ORNl^ 


•i-i-- 


VALUE  AND  DISTRIBUTION 


Value  and  Distribution 


A    CRITICAL    AND    CONSTRUCTIVE 
STUDY 


By 

HERBERT  JOSEPH  DAVENPORT 

Associate  Professor  of  Political  Economy 
The  University  of  Chicago 


3-5S7? 


CHICAGO 

THE  UNIVERSITY  OF  CHICAGO  PRESS 

1908 


Copyright  1907  By 
The  University  of  Chicago 


Published  February  1908 


Composed  and  Printed  By 

The  University  of  Chicago  Press 

Chicago,  Illinois,  U.  S.  A. 


U 


2-0 1 


To  J.  Laurence  Laughlin: 

In  a  field  so  controversial  as  this  of  value  doctrine, 
identity  of  interest  is  no  pledge  of  agreement;  much,  there- 
fore, in  the  following  pages  must  fail  to  command  your 
acquiescence.  Nevertheless,  I  venture  to  hold  you  in  some 
sort  responsible  for  the  existence  of  this  book,  by  virtue  of 
the  very  fact  that  it  has  been  only  through  the  freedom 
of  thought  and  of  teaching  which  you  have  fostered  that  it 
has  been  made  possible. 

The  Author 


PREFACE 

Were  it  ever  important  to  decide  in  what  degree,  if  at 
all,  a  writer  may  claim  priority  in  the  development  of  doc- 
trine, the  task  would  be  a  peculiarly  difficult  one  in  the  case 
of  the  present  book.  The  truth,  however,  rather  than  any 
personal  ascription  of  it  being  the  important  matter,  it 
becomes  worth  while  to  reflect  that  for  several  decades  and, 
indeed,  in  the  main  since  the  time  of  Adam  Smith,  economic 
theory  has  been  in  possession  of  doctrines  enough  for  a 
reasonably  complete,  consistent,  and  logical  system  of 
thought — if  only  these  doctrines  had  been,  with  a  wise 
tz.        eclecticism,  properly  combined  and  articulated. 

fO  The  emphasis  in  the  present  volume  upon  the  entre- 

preneur point  of  view  in  the  computation  of  costs  and  in 
the  analysis  of  the  process  by  which  distributive  shares  are 
assigned,  has  nothing  new  in  it ;  it  was  necessary  only  that 
the  point  of  view  be  clearly  distinguished,  consistently  held, 
and  fully  developed. 

The  present  writer  has  emphasized  opportunity  cost; 
but  this  doctrine  is  everywhere  implied  in  economic  dis- 
-•  cussion ;  the  marvel  is  that  it  has  been  there  only  uncon- 
cJ  sciously  or  half  consciously.  As  far  as  the  present  writer  is 
(3*  informed,  D.  I.  Green  was  the  first  to  formulate  the  doc- 
trine in  entire  definiteness — the  present  writer  the  first  to 
Ci       give  it  systematic  application. 

^  To  making  precise  the  concept  of  profit  and  to  elucidat- 

ing the  relations  of  profit  to  cost  some  contribution  has 
perhaps  been  made  in  the  present  book. 

The  insistence  that  rent  is  a  part  of  cost  of  .production, 
in  full  parallel  with  other  outlays,  follows  necessarily  from 
the  acceptance  of  the  entrepreneur  point  of  view ;  the  doc- 
trine is  as  old  as  entrepreneurship.  Nor  is  it  new  in 
economic   discussion ;   political   economy   began   there,   but 


viii  PREFACE 

wandered  afield  in  search  of  labor  determinants  of  value 
and  of  labor  standards  of  value  measurement.  Cannan  has 
perhaps  best  led  in  the  return  to  the  better  way. 

The  cancellation  of  the  distinction  between  value-deter- 
mined and  value-determining  costs  was  inevitable  when 
once  this  return  was  accomplished. 

Likewise  there  is  little  in  the  marginal  analysis  that  can 
be  offered  as  new ;  Ricardo  applied  it  fractionally ;  the 
moderns  have  merely  extended  the  applications :  it  only 
remained  to  point  out  some  aspects  and  limitations  of  its 
service. 

Precisely  so  of  utility  and  of  its  modern  refinements; 
but  the  relativity  of  utility  on  the  demand  side,  and  of  cost 
on  the  supply  side,  of  the  market  equation,  has  seemed  in 
especial  need  of  emphasis.  But  on  the  demand  side  all  this 
was  fully  worked  out  by  Marshall  twenty  years  since. 

The  competitive  entrepreneur  rendering  of  the  capital 
•concept  was  fairly  well  held  as  far  back  as  the  work  of 
Say  and  of  Malthus :  Clark,  Fisher,  and  Fetter  have  con- 
tributed greatly  to  the  widening  of  the  concept  of  capital 
socially  considered ;  Cannan  and  Veblen  to  the  individualis- 
tic emphasis :  the  elaboration  of  the  loan- fund  doctrine  was 
perhaps  left  still  to  be  done. 

Interest  theory,  in  that  formulation  which,  by  title  of 
adequate  recognition,  systematization,  and  development. 
Fetter  has  rightly  made  his  own,  is  traceable  at  least  as  far 
back  as  Say ;  was  adequately  formulated — but  the  result  of 
it  unseen — by  Wieser  and  by  Clark,  and  was  by  the  latter 
valiantly  battled  for.  But,  as  it  seems  to  the  present  writer, 
the  relations  of  concrete  productivity  to  time  discount  are 
impossible  of  explanation  otherwise  than  with  the  accept- 
ance of  the  competitive  rendering  of  the  capital  concept, 
and  with  the  recognition  of  the  loan-fund  subdivision  of 
competitive  capital. 

Something  also  has  perhaps  been  accomplished  in  these 
pages  toward  the  elucidation,  for  working  purposes,  of  the 
distinction   between    the   primary   and-  the    secondary    dis- 


PREFACE  IX 

tributive  processes  and  of  their  interactions;  nothing  very 
serious  appears  to  be  the  matter  with  present  society  from 
the  point  of  view  purely  of  the  traditional  production  dis- 
tribution; the  difficulties  mostly  relate  to  the  secondary 
process. 

Evidently,  then,  if  anything  worth  the  doing  has  been 
accomplished  here,  any  implication  of  which  the  author 
would  disclaim  further  than  is  inevitably  implied  in  getting 
oneself  published,  this  cannot  be  so  much  in  any  contribu- 
tion of  new  doctrine  as  in  the  selection,  delimitation,  and 
articulation  of  the  old.  To  this  end  the  necessary  thing 
has,  in  the  main,  seemed  to  be  to  rid  the  science  of  doctrines 
that  do  not  belong  in  it,  e.  g.,  labor-time,  labor-pain,  utility, 
and  marginal-utility  determinants  or  measures  of  value; 
real  costs;  marginal  fixation  of  price  or  of  distributive 
shares ;  price-determined  and  price-determining  costs  or 
distributive  shares ;  instrument  margins ;  marginal-produc- 
tivity distribution ;  price  measures  of  utility ;  the  social 
organism ;  fundings  of  productive  agents ;  the  tripartite 
classification  of  productive  factors. 

And  if  all,  or  any  considerable  part  of  this,  has  really 
been  accomplished,  it  is  enough. 

Chicago,  August   io,   1907 


TABLE  OF  CONTENTS 

CHAPTER  PACK 

I.  Various  Cost  Concepts i 

II.  Adam  Smith 8 

III.  RiCARDO 29 

IV.  Senior 44 

V.  John  Stuart  Mill 53 

VI.  Cairnes 62 

VII.  Further  Cost  Doctrines 84 

Vin.  Profit  Defined:   Profit  and  Risk  as  Related  to 

Cost 94 

IX.  Early  Utility  Theory:  Say 107 

X.  The  Capital  Concept 121 

XI.  Capital  as  a  Competitive  Concept  ....  141 
XII.  Competitive   Savings  and  Social  Capital:    Loan 

Fund  and  Abstract  Capital 157 

XIII.  The  Standard  of  Deferred  Payments   .       .       .  175 

XIV.  Interest 189 

XV.  Interest — Concluded 217 

XVI.  Rent  and  Cost — Marginal  Cost — Relative  Cost  262 

XVII.  The  Modern  Movement 296 

XVIII.  Classical  vs.  Modern 334 

XIX.  The  Positive  Theory  and  Natural  Value    .       .       .  353 

XX.  The  Attempt  at  Reconciliation:   Marshall        .  372 

XXI.  The  Attempt  at  Reconstruction:  Hobson    .       .  405 

XXII.  Distribution  by  Value  PRODtCTiviTY:   Clark  439 

XXIII.  The  Laws  of  Return 480 

XXIV.  The  Dynamics  of  Value  and  Distribution   .       .  512 
XXV.  The  Adjustment  of  Price 533 

XXVI.  Distribution 554 

XXVII.  Summary  of  Doctrine 569 

Index 577 


CHAPTER  I 
VARIOUS  COST  CONCEPTS 
The  scientific  development  of  economic  theory  began 
with  the  attempt  to  solve  the  value  problem.  Almost  all 
early  doctrine  was  cost  doctrine  in  some  one  or  other  of  its 
protean  aspects.  With  the  earlier  writers  of  the  classical 
school,  cost  was  prevailingly  interpreted  in  terms  of  labor; 
but  in  the  detailed  working-out  of  the  value  problem  and 
of  its  further  development,  the  notion  of  cost  came  to  be 
presented  in  practically  all  of  its  different  and  conflicting 
senses.  A  brief  analysis  of  the  various  ways  in  which  the 
cost  concept  was  employed  in  classical  discussion  will,  then, 
afford  a  serviceable  introduction  to  the  value  problem.  The 
work  of  Adam  Smith  will  be  found  surpassingly  well 
adapted  to  the  purposes  of  this  analysis. 

Labor-purchase  cost. — The  doctrine  of  the  earlier 
economists  that  labor  is  the  original  source  of  value  con- 
tained, even  at  that  time,  nothing  especially  novel  or 
recondite;  so  much  had  been  announced  long  aforetime  and 
upon  very  excellent  authority :  "In  the  sweat  of  thy  brow 
shalt  thou  eat  bread."  He  that  will  not  work  neither  shall 
he  eat.  Labor  and  the  hire  of  labor  appear  both  ideally 
and  practically  to  have  an  intimate  association.  What  one 
gains  at  fishing  or  hunting  depends  mostly  or  largely  on  the 
quality  and  zeal  of  the  quest.  Give  Crusoe  his  island,  and 
what  he  will  get  from  it  will  depend  upon  the  sort  of 
person  that  Crusoe  is — his  industry  and  intelligence,  in 
short,  the  quality  of  his  work.  Set  a  group  of  colonists 
upon  its  newly  found  island  or  continent;  what  gets  accom- 
plished there,  the  results  achieved,  the  well-being  attained, 
will  depend  upon  the  more  or  less  of  productive  effort 
applied.  Product  is  readily  thought  of  as  so  much  commod- 
ity purchased  at  the  price  of  effort,  a  primitive  transaction 


2  VALUE  AND  DISTRIBUTION 

in  exchange — in  the  long  run  also,  a  method  espe- 
cially satisfactory  in  character  and  naive  in  its  simplicity  of 
justice,  where  deserving  and  receiving  tend  to  fall  out  in 
strict  proportion.  At  any  rate,  such  is  the  gist  of  the  doc- 
trine stated  by  Adam  Smith:  "The  annual  labor  of  every 
nation  is  the  fund  which  originally  supplies  it  with  all  the 
necessaries  and  conveniences  of  life."  Therefore,  accord- 
ingly as  this  output  "bears  a  greater  or  smaller  proportion 
to  those  who  are  to  consume  it,"  is  the  nation  better  or 
worse  off.^ 

Labor  was  the  first  price,  the  original  purchase  money,  that 
was  paid  for  all  things.  It  was  not  by  gold  or  by  silver,  but  by 
labor  that  all  the  wealth  of  the  world  was  originally  purchased; 
and  its  value  to  those  who  possess  it  and  who  want  to  exchange 
it  for  someone's  production  is  precisely  equal  to  the  quantity  of 
labor  which  it  can  enable  them  to  purchase  or  command.^ 

It  must  be  noted,  however,  that  his  view  of  the  case  may 
be  taken  to  express  merely  a  social  or  collective  aspect  of 
the  labor-value  doctrine,  the  national  income  being  regarded 
as  the  return  upon  the  national  productive  energies  applied 
as  a  unit  to  the  national  environment.  The  terms  of  pro- 
curement, the  purchase  outlays,  are  the  efforts  applied. 
This  reasoning  is  equally  applicable  to  a  Crusoe  economy ; 
the  income,  the  wage,  the  remuneration,  is  obtained  as  a 
result  of  the  labor  put  forth;  nothing  need  be  implied, 
possibly  nothing  can  safely  be  deduced,  as  to  the  exchange 
relations  to  be  established  between  different  portions  of  the 
product  obtained;  but  conceiving  this  product  as  a  unit 
total,  the  labor  stands  as  the  cost  with  the  product  as  the 
produced  value.  This  may  be  termed  the  labor-purchase 
concept  of   cost. 

Labor-time  cost. — But  if  a  basic  measurement  of  value 
and  a  method  of  comparison  of  different  value  items  be 
sought,  and  if  it  be  asked  by  what  method,  in  this  sense,  is 
labor  to  be  taken  as  cost,  other  notions  emerge.  Measure- 
ment by  the  hour  or  by  the  day  lies  most  readily  at 
hand.     The   isolated  producer   would   find   time   the   most 

*  Wealth   of   Nations,    "Introduction." 
'  Ibid.,  chap.  iv. 


VARIOUS  COST  CONCEPTS  3 

simple  and  practicable  common  denominator  of  costs.  So  a 
collectivist  community,  especially  were  it  of  a  democratic 
habit  of  thought,  would  incline  to  apply  the  labor  power  at 
its  disposal,  and  to  distribute  the  product,  according  to 
units  of  time. 

Lahor-pain  cost. — But  whether  or  not  a  collectivist 
society  could  practically  do  better  than  this,  and  whether 
for  ordinary  purposes  Crusoe  would  attempt  anything 
further,  it  is  certain  that  in  exceptional  cases  the  isolated 
producer  would  add  some  modifications ;  the  crude  time 
reckoning  would  be  amended  to  allow  for  considerations  of 
especial  hazard  or  severity  or  irksomeness.  Combinations 
of  the  hazardous  with  the  pleasant,  e.  g.,  the  hunt  as  against 
the  safe  but  tedious  processes  of  agriculture,  would  inevi- 
tably present  themselves.  For,  after  all,  the  essential  fact  of 
time  cost  is  not  the  time  aspect  pure  and  simple,  but  the 
burdensomeness  involved  or  the  disinclination  overcome. 
As  soon,  therefore,  as  the  concept  of  cost  receives  a  more 
careful  analysis,  pain  cost  will,  at  least  in  the  individual 
computation,  be  found  fundamental  to  time  cost. 

Put  in  other  form,  the  form  which,  as  we  shall  see, 
Ricardo  would  have  especially  chosen,  the  notion  would  run 
something  as  follows :  the  purpose  of  productive  activity  is 
the  attainment  of  the  means  of  pleasure ;  pain  is  the  cost  of 
getting  pleasure  and  may  therefore  serve  adequately  to 
express  the  relative  values  of  these  pleasures  obtained  or  of 
the  facts  or  media  through  which  the  pleasures  are 
obtained.  And  it  is  thus  that  Ricardo  came  to  distinguish 
so  sharply  between  riches  and  value;  with  riches  the 
emphasis  is  upon  utility ;  with  value  it  is  upon  cost.^ 

'  "Value  depends  ....  on  the  difficulty  or  facility  of  production. 
The   labor  of  a  million   men  in  manufactures  will  always  produce  the 

same   value,  but  will   not  always  produce  the   same   riches A 

million  of  men  may  produce  double  or  treble  the  amount  of  riches,  of 
"necessaries,  conveniences  and  amusements,"  in  one  state  of  society 
that  they  could  produce  in  another,  but  they  will  not  on  that  account 

add    anything    to    value Riches   do    not   depend    on    value." — 

Ricardo,  Political  Economy   (Conner),  chap.  xx. 


4  VALUE  AND  DISTRIBUTION 

Labor-value  cost. — But  inasmuch  as  labor  involves,  or 
at  all  events  commonly  implies,  some  degree  of  pain,  is  it 
not  logical  to  conceive  of  the  attendant  pain  as  the  neces- 
sary condition  to  the  existence  of  labor — the  purchase 
price  on  terms  of  which  one  comes  into  possession  of  his 
own  labor  power?  Just  as,  in  getting  control  of  the 
services  of  others'  labor,  one  makes  a  sacrifice  of  purchasing 
power — good  or  money — precisely  so  one  may  be  conceived 
to  hire  or  buy  his  own  labor  effectiveness  on  the  terms  and 
at  the  charge  of  the  pain  attendant  upon  labor.  Based, 
therefore,  upon  its  cost,  it  has  been  found  possible  to 
ascribe  a  value  to  labor  itself  irrespective  of  the  value  of  the 
product,  which  basic  value  may  be  conceived  as  carried  over 
to  the  commodity  produced,  and  as  incorporated  as  a  cost 
therein,  the  value  of  the  product  being  the  incorporated 
labor  value  consumed  in  the  process  of  production.  Obvi- 
ously this  view  goes  further  than  the  labor-pain-cost 
theory :  the  labor-value-cost  theory  explains  value  not 
merely  by  the  pain  of  labor  but  by  ascribing  to  the  labor 
itself,  because  of  the  pain,  a  value  fundamental  as  cost  to 
the  value  of  the  thing  produced.* 

Closely  related  to  the  foregoing,  and  with  difficulty  dis- 
tinguishable from  it,  is  another  concept  of  labor  value : 
Life  being  essentially  activity  in  conjunction  with  con- 
sciousness, and  economic  products  being  the  concrete  and 
objective  resultant  of  this  activity  with  its  associated  and 
attendant  pain,  labor  appears  to  take  on  value  by  virtue  of 
the  fact  that  labor  is  the  very  expression  and  incorporation 
of  life  itself.  Value  in  products  is  thus  conceived  as  tracing 
back,  through  the  value  of  labor  as  cost,  to  the  thought 
of  draft  against  life  and  of  expenditure  of  life;  product 
thereby  bears  value  as  the  simplest  case  under  the  doctrine 
of  costs. 

All  of  these  computations  of  cost  are,  however,  open  to 
the  objection  that  they  are  over-simple  in  the  conditions 


VARIOUS  COST  CONCEPTS  5 

assumed :  no  provision  is  made  for  production  under  the 
capitalistic  wage  system ;  on  the  contrary,  each  case  is  taken 
as  one  of  independent  production,  of  self-employment.  A 
new  classification  of  costs  is  therefore  to  be  made,  accord- 
ingly as  the  case  is  one  of  employer  cost  or  of  employee 
cost.  The  concept  of  labor-pain  cost  does  not  readily  find 
place  for  itself  under  the  system  of  entrepreneur  produc- 
tion. Typically  and  at  its  simplest,  employer  cost  is  outlay 
cost;  employee  cost,  on  the  other  hand,  must,  if  it  apply 
at  all,  resolve  itself  into  some  one  or  other  of  the  aspects  of 
labor  cost. 

But  even  for  cases  of  independent  production,  the  fore- 
going analysis  fails  of  adequacy  in  omitting  to  take  account 
of  capital-use  and  instrument-use  costs  and  of  other 
charges  not  necessarily  included  under  the  head  of  outlays. 
What  disposition  shall,  for  instance,  be  made  of  the  item  of 
compensation  for  the  time  use  of  that  part  of  the  entre- 
preneur's circulating  or  floating  capital  employed  as  wage 
fund  in  the  hiring  of  laborers?  Here,  then,  we  have  also  a 
capital-use  cost,  whether  this  be  regarded  as  risk  cost  or  as 
interest  cost  or  as  a  composite  of  both. 

But  if,  outside  of  risk  and  upkeep,  a  compensation  is  to 
be  computed  for  the  owner  of  saved  wealth,  upon  what  basis 
shall  this  computation  be  made?  If  the  capitalist  entrepre- 
neur is,  so  far  as  his  capital  is  concerned,  to  be  remunerated 
for  the  restraint  implied  in  non-consumption,  for  the  saving 
involved  in  capitalization,  we  arrive  at  the  notion  of  absti- 
nence cost.  If,  however,  the  rewards  are  better  figured 
upon  the  basis  of  what  the  capital  might  have  earned  if  lent 
out,  we  must  take  account  of  a  loan-interest-displaccment 
or  an  investment-opportunity  cost. 

And  if,  on  the  other  hand,  the  capital  charge,  in  the 
given  employment,  is  to  be  rated  at  what  the  capitalist 
entrepreneur  could  have  made  the  capital  yield  him  in  some 


6  VALUE  AND  DISTRIBUTION 

alternative  productive  use,  we  must  make  room  for  capital- 
prodiict-opportunity  cost. 

And  bearing  in  mind  that  the  entrepreneur  might  as 
employee  have  applied  his  personal  powers  on  terms  of 
salary  or  wages,  or  might  under  self -employment  have 
applied  himself  to  some  other  line  of  production,  we  are 
compelled  to  catalogue,  as  possible  cost  concepts,  these 
further  cases  of  personal-ivage-displaccmoit  and  personal- 
product-displacement  (opportunity)   costs. 

And  now  under  the  general  head  of  employer  costs  are 
to  be  catalogued  some  further  concepts  acceptable  accord- 
ingly as  cost  notions  have  received  modification  through 
various  theories  regarding  the  determination  of  wages, 
rent,  and  interest. 

Wealth  having  been  conceived  as  the  product  of  labor, 
and  capital  as  stored-up  wealth  devoted  to  further  produc- 
tion, interest  has  sometimes  been  regarded  as  the  indirect 
payment  of  wages;  and  the  different  notions  of  labor  cost 
— time,  pain,  and  value — have  been  employed  as  the  ulti- 
mate explanation  of  interest,  thus  reducing  it  to  the  com- 
mon denominator  of  pain. 

But  evidently  there  must  cut  across  this  line  of  analysis 
the  distinction  between  employer  cost  and  employee  cost — 
that  is,  between  cost  to  the  borrower  and  cost  to  the  lender. 
If  interest  is  indeed  wages  in  disguise,  that  which  is  time  or 
pain  or  value  cost  to  the  producer  of  the  capital  must  be 
outlay^  or  investment-opportunity  or  product-opportunity 
cost  to  the  borrower. 

In  this  last  sense,  also,  there  is  room  for  argument  for 
the  establishment  of  an  investment-opportunity  or  product- 
opportunity  cost  with  reference  to  rent  outlays ;  more  than 
mere  mention  of  this  notion  is,  however,  impracticable  at 
this  point  in  the  discussion. 

So  far  as  outlays  in  wages  are  concerned,  it  may  be 
forcibly  urged  that  cost-of-production   influences   underlie 


VARIOUS  COST  CONCEPTS  7 

and  determine  the  wage  level :  to  the  extent,  therefore,  that 
labor  is  directly  or  indirectly  the  source  of  value,  this  view 
would  make  the  subsistence-cost  value  of  labor  the  deter- 
minant both  of  the  labor  value  to  the  laborer  and  of  the 
wage  outlay  to  the  employer.  Under  this  head  of  subsist- 
ence-value cost  would  fall  the  two  doctrines  of  standard- 
of -living-wage  cost  and  minimum-of-existence-wage   cost. 

Without  venturing  to  assume  that  no  other  cost  con- 
cepts can  be  recognized  in  classical  discussion,  it  may  be 
confidently  asserted  that  all  of  the  foregoing  concepts  are 
to  be  found  therein.  Nor  is  it  at  present  attempted  to  make 
the  catalogue  of  cost  concepts  and  cost  distinctions  exhaust- 
ive. But  it  is  especially  necessary  to  call  attention  at  this 
point  to  the  distinction  between  individual  (competitive) 
and  social  (collective)  costs,  as  of  fundamental  and  far- 
reaching  significance.  These  concepts,  while  not  readily 
presented  at  this  time,  will  come  in  later  for  a  deal  of 
discussion. 


CHAPTER  II 
ADAM    SMITH 

After  making  it  clear  in  his  introductory  chapter  that 
the  population  of  a  country  is  better  or  worse  off  accord- 
ingly as  the  total  product  "bears  a  greater  or  smaller  pro- 
portion to  those  who  are  to  consume  it/'  Adam  Smith  goes 
on  to  assert  that,  for  the  most  part,  the  average  share  of 
consumers  must  depend  upon  the  skill  and  dexterity  of  the 
labor,  but  also,  in  some  part,  "on  the  proportion  between 
the  number  of  those  employed  in  useful  labor  and  of  those 
who  are  not  so  employed.  Whatever  be  the  soil,  climate, 
etc.,  the  abundance  or  scarcity  of  its  annual  supply  must,  in 
that  particular  situation,  depend  upon  these  two  circum- 
stances." And  so,  with  any  particular  situation  given  or 
assumed,  the  labor  of  a  nation  "is  the  fund  which  originally 
supplies  it  with  all  the  necessaries  and  the  conveniences  of 
life."  This  we  have  termed  the  labor-purchase  doctrine  of 
cost. 

But  it  is  fair  to  say  that  Adam  Smith  does  not,  at  this 
particular  point,  make  much  of  this  doctrine,  or  attempt  to 
apply  it  as  an  explanation  of  the  value  relations  between 
goods.    But  in  chapter  v  the  step  is  fully  taken : 

Labor  was  the  first  price,  the  original  purchase  money  that 
was  paid  for  all  things.  It  was  ....  by  labor  that  all  the  wealth 
of  the  world  was  originally  purchased;  and  its  value  to  those  .... 
who  want  to  exchange  it  for  some  new  productions,  is  precisely 
equal  to  the  quantity  of  labor  which  it  can  enable  them  to  purchase 
or  command. 

It  is,  however,  to  be  noted  that  the  reasoning  according 
to  which  labor  is  the  first  purchase  price  holds  only  when  the 
"particular  situation"  is  assumed;  so  much  as  this  must  be 
taken  for  granted  as  somehow  given  in  the  reckoning,  a  con- 
tinent, or  island,  or  country,  in  which  the  labor  is  put  forth ; 
and  only  such  degree  of  "originality"  in  production  can  be 
imputed  to  the  labor  as  may  be  worked  out  by  regarding 
the  situation,  the  habitat,  as  a  passive  rather  than  as  an 


ADAM  SMITH  9 

active  fact — as  opportunity  rather  than  as  productive 
power.  For  whatever  vakie  there  is  in  the  distinction 
between  condition  and  cause,  the  environment  must,  in  this 
view,  stand  as  the  condition  and  labor  as  the  cause.  But 
none  the  less  must  the  productive  output  differ  with  differ- 
ences in  environmental  opportunity;  the  terms  of  the 
exchange  between  man  and  nature  must  vary  with  the 
varying  opportunities  for  production,  labor  having  a  greater 
or  less  producing  power  with  the  varying  bounty  or  nig- 
gardliness of  the  environment.  And  so,  while,  socially 
speaking,  the  labor-fund-purchase  idea  is  a  cost  doctrine 
of  the  labor  sort,  it  is  such  by  the  very  fact  that  it  is  social 
in  character  and  treats  the  whole  product  as  a  unit  pur- 
chased by  the  whole  of  the  labor  applied.  But  evidently, 
so  far  as  the  product  is  taken  as  a  whole,  as  a  unit,  and  as 
set  over  against  the  total  of  labor  producing  it,  no  key  is 
given  to  the  exchange  relations  between  different  portions 
of  this  product.  Even  for  the  Crusoe  case,  his 
different  units  of  effort  could  be  represented  in 
products  of  equal  utility,  only  upon  the  assumption 
of  absolute  uniformity  of  advantages  in  the  conditions 
of  production,  that  is,  upon  the  assumption  of  no  extensive 
or  intensive  land  differentials,  and  so  of  no  law  of  diminish- 
ing returns  of  any  sort.  And  likewise  also,  Crusoe  himself 
must  always  remain  at  one  level  of  vigor,  alertness,  and 
intelligence.  That  is  to  say,  not  merely  homogeneity  in 
environmental  conditions,  but  absolute  homogeneity  in 
labor  quality  must  be  assumed,  in  order  that  either  for  an 
individual  or  for  society  the  labor-fund-purchase  doctrine 
could,  as  a  cost  doctrine,  be  adapted  for  service  either  as  a 
measure  or  as  a  determinant  of  exchange  relations.  And  it 
may  be  remarked  in  passing  and  as  awaiting  a  more  exhaust- 
ive discussion  later,  that  precisely  the  same  defects  inhere 
in  all  applications  of  labor  time,  labor  pain,  or  labor  value, 
as  cost  measures  or  as  cost  determinants,  unless  possibly  as 
somehow  worked  out  from  the  point  of  view  of  the  employer 
rather  than  of  the  isolated  or  self-employed  producer. 

And  precisely  this  change  in  point  of  view  is  to  be 
remarked  in  the  chapter  immediately  following  upon  Smith's 
introduction.  This  is  the  chapter  containing  the  famous 
pin  illustration  of  the  advantages  of  division  of  labor :  per- 
haps, it  is  said,  the  larger  application  of  this  principle  to 
manufactures  explains  the  higher  productivity  of  these  as 


lO  VALUE  AND  DISTRIBUTION 

against  agriculture,  and  the  greater  opulence  of  advanced 
and  manufacturing  peoples  as  against  backward  and  agri- 
cultural peoples. 

The  most  opulent  nations,  indeed,  generally  excel  all  their 
neighbors  in  agriculture  as  well  as  in  manufacturing;  but  they  are 
commonly  more  distinguished  by  their  superiority  in  the  latter 
than  in  the  former.  Their  lands  are  in  general  better  cultivated 
and,  having  more  labor  and  expense  bestowed  on  them,  produce 
more  in  proportion  to  the  extent  and  natural  fertility  of  the 
ground. 

But  oddly  enough,  Smith  remarks,  the  products  are  not 
cheaper  with  these  better  methods  and  time-saving  devices : 
despite  the  fact  that  corn  lands  are  better  cultivated  in 
England  than  in  France,  and  in  France  than  in  Poland, 
corn  in  Poland  is  as  cheap  as  in  France,  and  in  France  as 
in  England:  "This  superiority  of  produce  is  seldom  more 
than  in  proportion  to  the  superiority  of  labor  and  expense." 
But  note  the  phrase,  "labor  and  expense."  Does  Smith 
mean  more  labor  in  point  of  time,  or  merely  more  expensive 
labor,  labor  paid  on  a  higher  wage  level?  Surely — ques- 
tions of  density  of  population  aside — it  cannot  be  more 
labor  in  point  of  time.  In  fact,  in  view  of  the  especially 
marked  productiveness  of  manufacturing  industries,  it  is 
only  the  choicer  grades  of  land  or  of  land  power  that  can 
profitably  be  utilized;  the  return  per  unit  of  labor  should 
thereby  be  of  still  more  marked  superiority.    Thus,  on  "any 

^'  basis  of  labor  cost  in  terms  of  time  or  of  pain,  lower  rather 
than  higher  values  must  obtain.     There  is  nothing  for  it 

'■'but  to  shift  the  point  of  view  to  that  of  employer's  outlay, — 
as  Smith  does, — to  labor-value  cost  under  competitive  pro- 
duction, where  labor  value  appears  under  the  guise  of  wage 
payments  commanded  by  labor  as  a  productive  fact.  But 
note  that,  in  this  view,  labor-value  cost  is  not  a  pain  or  a 
life  value,  imposing  as  cost  its  value  upon  the  product,  but 
is  merely  the  market  value  of  labor  as  an  agent  of  produc- 
tion. The  case  is  more  nearly  one  where  the  product  is 
reflecting  value  back  upon  the  labor  agent. 


ADAM  SMITH  II 

And  yet,  if  such  is  tlic  case,  it  must  be  difficult,  as  Smith 
sees,  to  explain  the  undoubted  fact  that  agricultural  prod- 
ucts bear  often  the  higher  price  in  the  opulent  country. 
The  high  value  of  the  labor  when  employed  in  agriculture 
must  find  its  explanation  not  merely  in  the  high  value  of 
the  agricultural  product,  but  in  the  high  productiveness  of 
labor  employed  in  manufactures. 

The  labor  of  the  rich  country  ....  is  never  as  much  more 
productive  (in  agriculture)  as  it  commonly  is  in  manufac- 
tures  The    corn    of    the    rich    country,    therefore,    will    not 

always  come  cheaper  to  market  than  that  of  the  poor. 

The  ultimate  reasoning  for  all  this  is  as  follows:  The- 
high  value  productivity  in  manufactures  necessitates  that 
such  agriculture  as  is  followed  should  also  be  highly  value 
productive;  this  high  alternative  productiveness  imposes 
upon  the  employer  a  high  wage  outlay.  Thus,  in  terms  of 
employers'  outlay,  the  higher  "labor  and  expense"  bestowed 
in  the  more  opulent  country  affect  the  greater  product  to 
such  a  degree  that  the  prices  are  often  the  higher  in  the 
opulent  country. 

That  Smith  worked  out  fully  all  the  steps  of  the  argu- 
ment, or  was  conscious  of  all  the  implications  of  the  situa- 
tion as  he  outlined  it,  is  obviously  not  to  be  asserted ;  but  it  is 
clear  that  he  is  within  the  field  of  competitive  costs  and  of 
exchange  values  as  distinguished  from  collective  cost  and 
social  income.  More  than  half  consciously  he  is  employing 
the  notion  of  outlay  cost;  impliedly,  but  not  consciously,  he 
is  making  use  of  the  principle  of  displacement-opportunity 
cost,  in  one  of  its  most  typical  forms.  He  has,  in  truth, 
outlined  a  situation  in  which,  as  a  question  of  labor  invest- 
ment, or  of  social  and  collective  effort,  labor-purchase  cost, 
corn  is  cheap  instead  of  dear,  but  where  as  a  question  of 
competitive  cost  it  is,  because  of  the  displacement  condi- 
tions, high  in  cost  and  dear  in  price  and  in  exchange  value. 

It  is  doubtless  on  some  such  basis  as  this  that,  after 
mentioning  use  value,  he  distinguishes  between  I'alue  in 
exchange  and  real  value;  by  real  value  is  meant  labor- 
burden  value  as  the  norm  of  value,  that  value  which  traces 
back  to  the  ultimate  cost — the  real  price,  the  natural  price — 


12  VALUE  AND  DISTRIBUTION 

a  concept  which  seems  to  waver  between  the  labor-purchase 
idea  of  cost  and  the  labor-value  idea. 
*"'  But  later,  in  chapter  v,  there  is  a  distinct  enunciation  of 
labor-pain  cost,  expressed  as  a  value  quantity,  as  the  deter- 
minant of  the  real  value  of  labor.  Whatever  difficulties 
market  values  may  offer,  Smith  takes  it  as  clear  that,  in  the 
•^isolated  economy,  equal  volumes  of  labor  must  always  be  of 
equal  value  to  the  laborer,  because,  possible  variations  in  his 
personal  equation  aside,  "he  must  always  lay  down  the 
same  portion  of  his  ease,  his  liberty,  and  his  happiness." 
One  might  suppose  that  with  the  assumption  of  a  necessary 
uniformity  of  labor  pain  attendant  upon  equal  quantities 
of  labor,  there  is  assumed  a  uniformity  in  opportunity  and 
in  product;  such,  however,  is  not  the  thought;  no  matter 
how  great  the  volume  of  product  in  a  day,  the  aggregate 
value  will  be  invariable ;  it  is  the  commodity  units  that  must 
do  the  varying,  since  "it  is  their  value  which  varies,  and 
not  that  of  the  labor  which  produced  them."  Labor  is  their 
real  price  and  having  in  itself  a  value,  it  carries  this  value 
over  to  the  product.  Here  there  is  a  distinct  announcement 
of  the  labor-value-cost  doctrine,  and  an  implied  and  uncon- 
scious, but  equally  distinct,  repudiation  of  the  doctrine  of 
opportunity  cost;  that  is  to  say,  the  real  value  of  the 
product,  being  irrespective  of  the  volume  of  it,  must  the 
more  clearly  be  uninfluenced  by  any  question  of  possible 
alternative  product. 

In  this  fifth  chapter,  there  is  also  some  foreshadowing 
of  the  distinction  between  riches  and  value  later  made  so 
prominent  by  Ricardo.  Smith  says  that  "every  man  is 
rich  or  poor  according  to  the  degree  in  which  he  can  afford 
the  necessaries,  conveniences,  and  amusements  of  human 
life."  Possibly  he  would  himself  have  been  puzzled  to  say 
whether  the  term  "afford"  implied  the  concept  of  fund  or  of 
flow,  possessions  or  income ;  but  in  any  case,  the  thought  of 
riches  rests  upon  enjoyment  utilities  as  the  test.  How- 
ever, he  believes  that  inasmuch  as  under  division  of  labor 
each  man  produces  but  the  smallest  part  of  what  he  con- 


ADAM  SMITH  13 

sumes,  obtaining  through  exchange  the  results  of  others' 
labor,  one  "must  be  rich  or  poor  according  to  the  quantity 
of"  labor  which  he  can  command."  That  is  to  say,  the 
amount  of  necessaries,  conveniences,  and  amusements  is, 
after  all,  reducible  to  terms  of  command  of  labor — a  labor- 
purchase  rather  than  labor-origin  basis  for  value.  So  the 
value  of  any  commodity  that  one  has  produced  to  sell  "is 
equal  to  the  quantity  of  labor  which  it  will  enable  him  to 
purchase  or  command.  Labor,  therefore,  is  the  real  meas- 
ure of  the  exchange  value  of  all  commodities." 

Noting  carefully  that  we  are  now  arrived  at  a  doctrine 
of  exchange  value  and  not  of  real  value,  the  perplexity  pre- 
sented by  the  very  first  line  of  the  next  paragraph  will  dis- 
appear;  the  thought  here  reverts  to  the  primary,  the  real -value 
concept :  "The  real  price  of  everything,  what  every- 
thing really  costs  the  man  who  wants  to  acquire  it,  is  the 
toil  and  trouble  of  acquiring  it" — labor  cost  of  some  sort: 
but  "what  everything  is  really  worth  to  the  man  who  has 
acquired  it  is  the  toil  and  trouble  which  it  can  save  to  him- 
self and  which  it  can  impose  upon  other  people." 

Here  is  a  definite  enunciation  of  his  antithesis  of  real 
price  to  exchange  value.  Real  value  is  the  labor  it  took; 
but  when  once  you  have  the  thing  and  are  estimating  the 
quantum  of  it  as  riches,  its  wealth  to  you  as  a  salable  thing, 
its  utility  in  exchange,  you  look  simply  to  the  toil  and 
trouble  which  you  can  make  it  shield  you  from  by  imposing 
this  toil  and  trouble  on  someone  else.  When  you  command 
from  another  his  money  or  his  goods,  you  are,  in  final 
analysis,  levying  on  his  labor.  "What  is  bought  with  money 
or  with  goods  is  purchased  by  labor,  as  much  as  what  we 

acquire  by  the  toil  of  our  body These  things  contain 

the  value  of  a  certain  quantity  of  labor  which  we  exchange 
for  what  is  supposed  ....  to  contain  the  value  of  an 
equal  quantity." 

Thus,  so  far  as  all  this  may  be  made  consistent,  it  means 
that  real  price  or  real  value  is  always  the  labor  of  attain-- 
ment;  but  whether  this  labor  is  conceived  as  in  itself  a 


14  VALUE  AND  DISTRIBUTION 

value,  or  merely  as  burden,  is  not  so  clear.  Exchange  value 
is  the  labor  that  a  thing  will  by  sale  protect  the  owner  from, 
or  that  in  purchase  it  will  cost  the  buyer,  in  inducing  him'  to 
let  go  of  a  product  produced  by  his  own  labor.  And  thus 
exchange  value  seems  to  have  a  real  and  ultimate  basis  in 
real  value. 

Sometimes  also  Smith  seems  to  talk  of  a  fourth  sort  of 
value,  a  value  which  covers  the  temporary  disturbances  and 
variations  from  exchange  value.  And  it  is  added  that 
"though  labor  be  the  real  measure  of  exchangeable  value  of 
all  commodities,  it  is  not  that  by  which  their  value  is  com- 
monly estimated."  Labor  is  so  different  in  intensity,  skill, 
and  direction,  that  it  is  not  easy  to  find  any  accurate  meas- 
ure; but  a  sort  of  rough  equality  in  kind  is  worked  out 
through  the  higgling  and  bargaining  of  the  market.  Popu- 
lar thought,  however,  does  not  make  any  recourse  to  labor 
as  the  measure,  at  least  no  conscious  recourse;  most  people 
can  understand  commodities,  concrete  palpable  objects,  but 
labor  is  "an  abstract  notion  which,  though  it  can  be  made 
sufficiently  intelligible,  is  not  altogether  so  natural  and 
obvious." 

All  of  which  seems  to  mean  that,  rightly  understood,  it 
is  possible  to  reduce  labor  to  a  homogeneous  fund.  Of 
time?  Evidently  not.  Of  pain?  This  also  will  not  serve 
Of  value?  But  if  this  be  a  value  dependent  upon  the 
product,  and  derived  from  the  product,  it  is  clear  enough 
that  homogeneity  is  attainable  and  is  actually  attained,  but 
homogeneity  only  in  terms  of  the  very  value  that  it  is  sum- 
moned to  explain,  a  view  which  would,  in  the  last  analysis, 
conceive  labor  as  receiving  value  rather  than  as  determin- 
ing it.  And  upon  the  basis  that  labor  derives  its  value  from 
the  value  of  the  product,  labor  is  not  competent  to  give 
value,  unless  possibl}^  through  some  opportunity-cost 
analysis,  later  to  receive  attention. 

And  now  we  are  called  upon  to  note  that  Smith  uses  his 
labor  doctrine  or  doctrines  for  three  different  purposes, 
purposes  essentially  distinct  in  nature,  though  almost  hope- 
lessly confused  in  the  course  of  his  discussion.    At  one  time 


ADAM  SMITH  15 

labor  is  treated  as  the  determinant  source  of  all  value,  pre- 
cisely as,  in  the  mechanical  sense,  it  is  the  creative  source 
of  some  commodity  products.  At  another  time  attention 
is  directed  primarily  or  exclusively  to  the  discovery  of  a 
medium  of  measure,  a  mode  of  expression,  a  common 
denominator,  into  which  values  may  be  resolved  and  by 
which  they  may  be  made  homogeneous  and  comparable,  a 
standard  of  value  expression.  Or,  finally,  the  investiga- 
tion directs  itself  toward  the  discovery  of  a  standard  of 
deferred  payments,  a  medium  of  comparison  over  wide 
intervals  of  time. 

Selecting  the  third  of  these  aspects  as  first  in  the  order 
of  discussion,  it  would  perhaps  be  fair  that  not  much  be 
expected  from  a  writer  of  the  eighteenth  century,  in  view 
of  the  confusion  of  tongues  lasting  without  amelioration 
well  over  into  the  twentieth. 

Proceeding  from  the  general  point  of  view  of  the  doc- 
trine that  labor  is  the  source  and  the  measure  of  value  in 
ordinary  relations,  Smith  declares  for  labor  as  the  ideal 
standard  of  deferred  payments.  But  since  some  concrete 
and  tangible  fact,  in  terms  of  which  payment  can  readily 
be  made,  is  regarded  as  desirable,  Smith  inclines  to  advise, 
for  long-time  purposes,  corn,  and,  for  short-time  purposes, 
silver,  as  the  standard  commodity. 

Equal  quantities  of  labor  will  at  distant  times  be  purchased 
more  nearly  with  equal  quantities  of  corn,  the  subsistence  of  the 
laborer,  than  with  equal  quantities  of  gold  and  silver,  or  perhaps 
with  any  other  commodity.  Equal  quantities  of  corn,  therefore, 
will,  at  dififerent  times,  be  more  nearly  of  the  same  value,  or  enable 
the  possessor  to  purchase  or  command  more  nearly  the  same 
quantity  of  the  labor  of  other  people.^ 

It  is,  indeed,  true  "that  equal  quantities  of  corn  will  not 
do  it  exactly,"  for  standards  of  consumption  vary ;  other 
commodities,  however,  hold  coinmand  over  labor  by  virtue 

^Adam  Smith,    Wealth   of  Nations,   chap.   v. 


1 6  VALUE  AND  DISTRIBUTION 

solely  of  their  command  over  the  subsistence  of  labor  and 
in  proportion  thereto.    Thus 

a  rent  reserved  in  corn  is  liable  only  to  the  variations  in  the 
quantity  of  labor  vi^hich  a  certain  quantity  of  corn  can  purchase. 
But  a  rent  reserved  in  any  other  commodity  is  liable,  not  only  to 
the  variations  in  the  quantity  of  labor  virhich  any  particular  quan- 
tity of  corn  can  purchase,  but  to  the  variations  in  the  quantity  of 
corn  which  can  be  purchased  by  any  particular  quantity  of  that 
commodity ;' 

the  dangers  of  departure  from  the  labor  standard  are  there- 
fore squared. 

Evidently  this  might  do,  if  only  it  were  safely  to  be 
assumed  not  only  that  all  that  laborers  earn  they  spend  in 
subsistence,  but  also  that  corn  is  the  only  subsistence  com- 
modity ;  it  would  then  be  true  that  other  commodities  could 
command  labor  only  in  the  measure  that  they  were  exchange- 
able for  corn ;  corn  would,  then,  fall  short  of  an  ideal  labor 
standard  only  in  the  degree  that  the  laborer's  dole  of  corn 
were  a  varying  one. 

At  any  rate,  as  Smith  believes,  since  corn  spells  sub- 
sistence, corn  must  approximate  more  closely  to  the  labor 
standard  than  would  any  other  commodity. 

Nothing  is  made  here  of  a  doctrine  of  some  currency 
later,  that  wages  in  terms  of  money  must  rise  or  fall  with 
every  rise  or  fall  in  the  price  of  corn,  to  the  result  that  the 
laborer's  corn  wages  must  remain  a  practicably  unvarying 
quantity.  It  is,  indeed,  held  that  in  short-time  relations  real 
wages  in  terms  of  command  over  subsistence  necessities 
vary  widely.  "The  subsistence  of  the  laborer,  or  the  real 
price  of  labor,  as  I  shall  endeavor  to  show  hereafter,  is 
very  different  upon  different  occasions ;"  and  so,  while  "the 
real  value  of  a  corn  rent" — its  labor  significance — "varies 
much  more  from  year  to  year"  than  that  of  a  money  rent, 

it  varies  much  less   from  century  to  century But  the  value 

of  silver,  though  it  varies  greatly  from  century  to  century,  seldom 
varies  much  from  year  to  year,  but  frequently  continues  the  same, 
or  very  nearly  the  same,  for  half  a  century  or  a  century 
together In    the    meantime    the    temporary    and    occasional 

'  Adam  Smith,  op,  cit.,  chap.  v. 


ADAM  SMITH  1 7 

price  of  corn  may  frequently  be  double,  one  year,  of  what  it  had 
been  the  year  before. 

Thus,  in  general  purchasing  power,  as  tested  by  the  labor 
standard,  "from  year  to  year  silver  is  a  better  measure  than 
corn,"  while  "from  century  to  century  corn  is  a  better 
measure  than  silver."  ^ 

But  the  attempt  to  find  in  labor  a  common  denominator 
of  value  had  this  much  at  least  in  its  favor — that  if  labor 
would  not  serve  for  the  purpose,  nothing  else  was  at  hand 

'Ibid.,  chap.  v. 

This  is  not  the  place  for  an  adequate  discussion  of  the  general 
problem  of  the  standard  of  deferred  payments ;  little  more,  indeed, 
can  be  attempted  here  than  to  put  in  the  interrogation  points.  It  is, 
however,  evident  that  Smith's  reasoning  assumes  the  long-time  tend- 
ency of  wages  to  approximate  either  to  the  subsistence-minimum 
requirement,  or  to  the  standard-of-living  requirement.  His  argu- 
ment rests  upon  the  assumption  that,  over  long  periods  of  time,  corn 
varies  little  in  its  command  over  labor.  Presumably  this  stability  of 
relation  is  due  to  the  assumed  connection  between  population  increase 
and  the  necessities  of  subsistence  or  the  established  requirements  of 
existence.  Thus,  while  by  improvements  either  in  technique  or  in  the 
conditions  of  environment,  labor  might  for  a  considerable  period  be 
more  generously  rewarded  in  products,  this  condition,  it  is  thought,  is, 
after  all,  certain  to  be  a  temporary  one,  population  tendencies  being 
safely  to  be  relied  upon  to  take  up  the  slack,  whether  that  slack  be 
reckoned  as  a  differential  above  the  absolute  requirements  for  living, 
or  above  some  standard  of  consumption  below  which  laborers  will 
refuse  to  reproduce  themselves. 

There  may  be  reasons  enough  to  condemn  this  attempted  justifi- 
cation of  the  corn  standard  by  the  labor  standard,  consistently  with 
retaining  faith  in  the  labor  standard  itself ;  it  therefore  remains  to 
inquire  to  what  extent  Smith's  acceptance  of  the  labor  standard  was 
justifiable  in  the  light  of  the  theoretical  equipment  of  his  time,  and  to 
what  extent  and  with  what  modifications  it  may  serve  for  the  purposes 
of  more  modern  theory. 

There  was  for  Smith,  at  all  events,  this  much  of  justification  for 
the  acceptance  of  the  labor  standard — that,  in  his  view,  to  refuse  it 
would  be  abandon  all  hope  of  any  standard,  while  the  acceptance  of 
it  would  assimilate  the  standard  of  deferred  payments  to  the  standard 
of  value  for  current  exchanges — a  consummation  still  (though  per- 
haps for  no  very  evident  reason)  devoutly  desired  by  many  monetary 
theorists.  To  Smith,  as  to  most  economists  of  later  years,  the  prob- 
lem of  deferred  payments  presented  itself  as  a  value  problem.  Con- 
ceived as  such,  the  degree  of  development  of  theory  in  Smith's  time 
could  possibly  have  afforded  nothing  better  or  other  than  this  labor 
standard  ;  nor,  indeed,  has  later  theory  achieved  anything  more,  so  far 
as,  for  deferred-payment  problems,  cost  and  value  solutions  have  been 
the  object  of  search.  For  it  is  clear  that  value  conceived  merely  as  a 
ratio  of  exchange  affords  no  clue  to  a  deferred-payment  standard.  Only 
when,   as   the   essence   or   significance   or   determinant   of   value,    some 


1 8  VALUE  AND  DISTRIBUTION 

that  would.  It  may  not  yet  be  clear  on  precisely  what 
grounds  this  common  denominator  was  so  pronouncedly  a 
desideratum;  but,  for  whatever  it  was  worth,  the  labor 
measure  was  the  only  thing  possible  for  the  time.  And  it 
may  fairly  be  questioned  whether  later  thought,  in  its 
endeavor  to  substitute  utility  for  labor  cost  as  a  value  deter- 
minant, thus  stating  the  payment  problem  in  terms  of  utility 
truly,  but  only  of  utility  as  working  itself  out  in  terms  of 
value  expression,  has  been  able  to  do  more  upon  the  utility 
side  than  to  repeat  the  error  made  upon  the  cost  side,  that, 
namely,  of  seeking  to  compare  things  which  in  their  funda- 
mental nature  offer   no  basis   of  comparison ;   with   value 

underlying  principle  is  discovered,  is  it  possible  to  adopt  as  a  deferred- 
payment  basis  a  value  standard.  Whether  or  not  the  multiple  standard 
or  some  variable  subsistence  or  standard-of-living  standard  may  not 
now  be  regarded  as  preferable,  it  is  perhaps  sufficient  for  present  pur- 
poses to  point  out  that  these  are  standards  of  utility,  rather  than  of 
cost  or  of  value,  and  therefore  do  not,  in  strictness,  concern  this 
stage  of  the  discussion. 

But  it  may  none  the  less  be  possible  to  justify  the  labor  standard 
as  held  by  Smith  without  appeal  to  value  categories. 

It  is  evident  that  the  labor  and  the  standard-of-living  standards 
must  in  the  long  run  come  to  coincide,  or  at  all  events  must  always  be 
in  process  of  approaching  coincidence.  The  total  consumption  of 
wealth  depends  upon  the  total  productive  efficiency  of  society :  average 
consumption  is  the  derivative  of  average  production.  Standards  of 
living  express  the  general  or  average  efficiency  in  production,  as 
reflected  in  the  habits  and  customs  of  consumption.  It  is,  no  doubt, 
true  that  if  the  increase  in  the  per-capita  output  of  wealth  is  rapid,  the 
felt  necessities  of  adeqviate  living  may  somewhat  lag  behind  the  oppor- 
tunity afforded  by  the  level  of  production  ;  but  it  remains  true  that  the 
new  level  of  production  is  all  the  while  in  process  of  becoming  fixed 
as  a  new  level  of  requirement.  In  the  meantime,  however,  as  the 
history  of  the  last  hundred  years  abundantly  shows,  there  is,  because 
of  this  phenomenon  of  lagging — this  slack  between  the  lately  acquired 
power  and  the  earlier  established  need— room  for  some  shortening  of 
the  labor  day.  None  the  less  a  commodity  standard  of  payment  which 
should  coincide  with  the  labor  standard  must  be  a  standard  expressive 
of  the  changes  taking  place  in  labor  productiveness ;  not,  however, 
productiveness  in  terms  of  corn  alone,  but  productiveness  in  terms  of 
those  commodities,  whether  corn  or  other,  for  which  incomes  are 
expended — that  is,  productiveness  expressed  in  terms  of  the  derived 
consumption. 

What  bearing  has  all  this  upon  the  proposal  that  the  money  pay- 
ment should  be  adjusted  at  that  sum  of  money  affording  a  command 
over  commodities  equal  to  that  of  the  money  loaned — that  is  to  say, 
the  acceptance  of  the  principle  of  the  multiple  standard? 

Recalling  once  more  the  fact  that  this  computation  is  entirely  out- 
side the  value  field,  that  the  proposed  payment  is  in  terms  a  utility 
standard,  it  is  obvious  that  if,  between  loan  and  payment,  time  enough 
has  elapsed  for  an  appreciable  change  in  the  standard  of  living,  in  the 


ADAM  SMITH  19 

conceived  as  a  mere  ratio  of  exchange,  the  assertion  of 
equahty  or  of  inequality  between  two  vahies  can  have,  for 
the  purposes  in  hand,  no  possible  meaning,  unless  and  until 
some  basis  of  homogeneity  between  the  c[uantities  in  the 
respective  value  ratios  has  been  established.  Thus,  in  last 
analysis,  equality  for  deferred-payment  purposes  will  have 
to  be  worked  out  by  somehow  appealing  to  concepts  of 
quantity  rather  than  always  to  mere  ratios  between  quan- 
tities. 

So  much,  for  the  time  being,  for  the  deferred-payment 
problem ;  there  remain  for  discussion  Smith's  concepts  of 


felt  necessities  of  consumption,  payment  in  an  equal  command  over 
commodities  cannot  be  a  full  equivalent  for  the  benefits  received,  or  an 
adequate  indemnity  for  the  benefits  foregone.  The  want-satisfying 
quality  of  objective  units  of  goods  has  fallen ;  something  must  be 
allowed  here  not  only  for  changes  in  the  direct  service,  the  want-satis- 
fying power,  afforded  by  similar  items  of  goods,  but  more,  also,  for 
changes  of  service  consequent  upon  the  rising  level  of  requirement 
for  the  maintenance  of  social  position  and  relative  well-being.  It  is 
here  distinctly  to  be  recognized  that  in  large  measure  consumption  is 
itself  a  competitive  thing. 

Neither  in  theory,  therefore,  as  a  value  computation,  nor  in  its 
practical  working  out  as  a  utility  computation,  does  Smith's  labor 
standard  afford  an  entirely  satisfactory  basis  for  the  solution  of  the 
deferred-payment  problem.  "Ultimately  speaking,  things  are  not  useful 
because  they  cost  effort,  but  the  effort  is  put  forth  because  the  things 
are  useful.  It  was  usefulness  and  not  effort  that  the  debtor  borrowed, 
it  was  the  product  of  his  effort  and  not  effort  that  the  creditor  loaned. 
It  is,  then,  in  terms  of  usefulness  that  payment  should  be  made.  Labor 
is  the  producer  of  utility  and  not  the  substance  of  it. 

"But  it  must  be  remembered  that  by  this  very  measure  of  useful- 
ness, payment  must  be  made  in  something  more  than  an  equivalent 
command  over  commodities.  The  increased  effectiveness  of  labor  has 
brought  about  a  higher  level  of  consumption,  a  raised  standard  of 
comfort  and  of  life.  This  is  a  gain  to  such  members  of  society  as  are 
able  to  attain  to  this  new  level ;  it  is  the  reverse  to  those  who  fall 
[too  far]  short  of  it.  A  new  need  plus  the  ability  to  satisfy  the  need 
is  an  advance  in  well-being ;  without  the  ability  the  need  is  a  mis- 
fortune. The  line  then  of  compensation — of  equality  in  sacrifice — 
must  be  found  somewhere  above  equality  in  purchasing  power,  some- 
where below  equality  in  command  over  human  effort.  Something  must 
be  added  to  payment  on  account  of  the  greater  necessities  of  the  lender  ; 
something  also  on  account  of  greater  requirements  for  the  maintenance 
of  social  position  and  relative  well-being.  The  point  of  fair  adjustment 
is  to  be  found  where  the  direct  gain  from  larger  satisfactions  is  offset 
by  the  disadvantage  of  increased  requirements  and  decreased  com- 
mand over  social  distinction." — Davenport,  Outlines  of  Economic 
Theory,  p.  229. 

More  extended  discussion  of  this  problem  must  be  postponed  to  a 
later  chapter.     See  pages   175  to   188. 


20  VALUE  AND  DISTRIBUTION 

labor,  (i)  as  determinant  of  value,  and  (2)  as  measure  or 
denominator  of  coexisting  values, 
i^  ( I )  That  things  are  valuable  more  or  less  in  proportion 
to  the  labor  required  in  their  production  is  matter  of  com- 
mon observation;  the  Crusoe  analysis  sets  this  truth  forth 
in  simple  form.  But  the  principle  is  equally  manifest  in 
more  complex  conditions;  the  more  the  labor  required  for 
the  production  of  any  commodity  the  higher  the  wage 
outlay. 

Not  merely  this ;  but  for  the  simpler  aspects  of  produc- 
tion, and  in  large  measure  for  production  generally,  it  may 
be  said  that  products  trace  their  origin  to  human  labor; 
labor  is,^  technologically  speaking,  a  cause,  and,  in  careless 
thinking,  is  prone  to  be  taken  as  the  sole  technological 
cause  of  the  existence  of  things  possessing  value.  The  con- 
clusion thus  lies  readily  at  hand  that  the  quantity  of  labor 
content  is  the  determinant  of  exchange  value.  Labor  is  in 
this  view  conceived  not  merely  as  the  mechanical  cause 
of  product,  but  as  the  quantitative  cause  of  value,  just  as,  in 
later  thought,  the  utility  doctrine  has  been  applied  to  eluci- 
date the  causal  sequence :  utility  being  conceived  as  neces- 
sary condition  to  value,  there  is  constant  temptation  to 
explain  the  quantity  of  value  by  the  quantity  of  utility.  But 
in  either  case,  or  in  any  event  with  labor,  the  necessity 
presents  itself  of  arriving  at  some  basis  of  homogeneity; 
and  to  serve  as  explanation  of  value  this  homogeneity 
must  be  something  other  than  a  homogeneity  derived  from 
the  value  product. 

Nevertheless,  the  affairs  of  ordinary  business  life,  the 
commonplace  facts  of  the  wage  relation,  make  it  sufficiently 
evident  that  labor  has  a  value,  and  that  in  many  cases,  if  not 
in  all,  the  value  of  the  product  is  somehow  concerned  with 
the  value  of  the  labor  agents  required  in  its  bringing  forth. 
The  labor-value-cost  doctrine  is  unquestionably  true  in  the 
sense  that  the  value  of  labor  takes  some  part  as  a  determi- 
nant, whether  intermediate  or  ultimate,  of  value  relations. 
But  precisely  here  was  and  is  the  problem ;  is  this  labor 
value  ultimate  and  self-sufficing,  or  is  it  merely  an  inter- 
mediate term  in  some  longer  chain  of  causal  sequence? 
So  far  as  Smith  formulated  any  answer  to  this  question,  it 
was  to  ascribe  to  labor  a  non-derivative  homogeneity  and 
a  non-derivative  value,  and  to  make  this  value  serve  as  the 
explanation,  in  terms  of  causation,  of  exchange  relations. 

And  so  in  chapter  vi  it  is  argued  that  if  among  a  nation, 


ADAM  SMITH  21 

say,  of  hunters,  it  usually  costs  twice  the  labor  to  kill  a 
beaver  that  it  costs  to  kill  a  deer,  one  beaver  will  naturally 
exchange  for — will  be  worth — two  deer.  It  seems, 
indeed,  to  go  almost  without  saying  that  what  is  usually  the 
product  of  two  days'  or  two  hours'  labor  should  be  worth 
the  double  of  that  which  is  the  product  of  one  day's  or  one 
hour's  labor. 

But  the  further  discussion  makes  it  fairly  evident  that, 
the  hunter  case  was  chosen  by  Smith  as  one  of  approximate 
homogeneity  of  labor  power,  a  nation  of  hunters,  and  also, 
be  it  remarked,  as  a  case  of  the  relatively  minor  importance 
of  capital  or  land  considerations.  And  upon  this  assump- 
tion of  the  approximate  or  complete  homogeneity  of  pro- 
ductive agents  the  doctrine  sums  up  in  a  statement  of 
proportionality :  as  quantity  of  labor  is  to  quantity  of  labor, 
so  is  value  of  product  to  value  of  product ;  labor :  labor :  : 
value :  value.  And  neither  in  Smith's  nor  at  any  later 
time  has  this  been  open  to  question,  upon  the  assumptions 
made.  But  the  truth  admittedly  contained  in  the  proposi- 
tion does  not  of  necessity  impose  the  labor- value  explana- 
tion. The  non-mathematical  statement  of  the  case  is  equally 
exhaustive ;  unless  the  hunter  could  get  as  much  out  of  his 
labor  with  one  sort  of  game  as  with  the  other,  he  would 
trap  for  only  one  sort,  and  all  of  this  irrespective  of  any 
question  of  whether  hunting  be  a  pleasure  or  a  hardship, 
or  whether  labor  has  or  has  not  in  itself  a  value  by  its  own 
right.  In  point  of  fact  this  doctrine  of  proportion  is 
nothing  more  or  less  than  an  example  of  opportunity  cost 
applied  under  the  assumption  of  homogeneous  agents  of 
production. 

In  the  next  paragraph,  however,  it  is  said : 

If  the  one  species  of  labor  should  be  more  severe  than  the 
other,  some  allowance  will  naturally  be  made  for  the  superior 
hardship;  and  the  produce  of  one  hour's  labor  in  the  one  may  very 
frequently  exchange    for   that   of   two   hours'    labor   in    the    other; 

all  of  which  is  correct  as  matter  of  everyday  fact;  but 
note  that  in  just  so  far  does  the  proportion  doctrine  fail ; 
and  at  the  same  time  there  disappears  the  last  vestige  of 
time  cost.  Indeed,  there  appears  some  suggestion  of  pain 
cost.  And  yet,  by  the  sentence  next  following  pain  cost  is 
excluded : 

Or  if  the  one  species  of  labor  require  an  uncommon  degree  of 
dexterity  and  ingenuity,  the  esteem  which  we  have  for  such  talents 


X 


22  VALUE  AND  DISTRIBUTION 

will  naturally  give  a  value  to  their  produce  superior  to  what  would 
be  due  to  the  time  employed  about  it — 

the  old  labor-cost  doctrine,  but  supplemented  by  a  new  and 
non-cost  explanation  for  the  evident  and  perplexing  incre- 
ment of  value,  the  esteem  in  which  talents  are  held.  But  in 
the  succeeding  sentence  the  pain-value  doctrine  is  rehabili- 
tated : 

Such  talents  can  seldom  be  acquired  but  in  consequence  of  long 
application,  and  the  superior  value  of  the  produce  may  frequently 
be  [no?]  more  than  a  reasonable  compensation  for  the  time  and 
labor  which  must  be  spent  in  acquiring  them.  In  the  advanced 
state  of  society  allowance  of  this  kind  for  superior  hardship  and 
superior  skill  are  commonly  met  in  the  wages  of  labor. 

That  is  to  say,  the  greater  wage  must  at  least  counter- 
balance, for  the  individual  worker,  the  greater  hardship  of 
the  work  or  the  greater  expense  of  preparation,  else  the 
occupation  will  not  be  undertaken  or  will  be  abandoned. 
But  evidently  this  gives  no  explanation  for  the  superior 
wages  of  native  skill.  The  discussion  continues :  "Over 
and  above  what  might  be  sufficient  to  pay  for  the  price  of 
the  materials  and  the  wages  of  the  workmen" — employer's 
outlay  cost — "something  must  be  given  for  the  profits  of 
the  undertaker  of  the  work  who  hazards  his  stock  in  the 
venture."  Risk  cost?  "The  value  which  the  workmen  add 
to  the  materials,  therefore,  resolves  itself,  in  this  case,  into 
two  parts,  of  which  one  pays  their  wages,  the  other  the 
profits  of  the  employer."  But  that,  in  Smith's  thought, 
this  profit  includes  something  more  than  risk  profit  is  not 
open  to  doubt :  though  there  is  not  yet  any  necessary  sug- 
gestion of  wages  of  superintendence:  "two  parts,  of  which 
the  one,"  etc., 

the  other  the  profits  of  the  employer  upon  the  whole  stock  of 
materials  and  labor  which  he  advanced.  He  could  have  no  interest 
to  supply  them  unless  he  expected  from  the  sale  of  their  work  some- 
thing more  than  what  was  sufficient  to  replace  his  stock  to  him, 
and  he  could  have  no  interest  to  employ  a  great  stock  rather  than  a 
small  one,  unless  his  profits  were  to  bear  some  proportion  to  the 
extent  of  his  stock. 

This  might  well  be  jttstified  as  a  doctrine  of  opportunity 
cost,  but  such  seems  not  to  be  Smith's  thought ;  he  appears 
to  have  in  mind  merely  abstinence  cost,  as  a  quantity  addi- 
tional to  risk  cost. 


ADAM  SMITH  23 

111  every  great  work  almost  the  whole  labor  ....  is  committed 
to  some  principal  clerk.  The  owner  of  the  capital,  though  he  is 
thus  discharged  of  almost  all  labor,  still  expects  that  his  profits 
should  be  a  regular  proportion  to  his  capital.  In  the  price  of 
commodities,  therefore,  the  profits  of  stock  constitute  a  compo- 
nent part  altogether  different  from  the  wages  of  labor  and  regu- 
lated by  different  principles.^ 

Here  Smith,  perhaps  with  good  justification,  argues 
that  abstinence  cost  cannot,  at  all  events  proportionately,  be 
explained  or  defended  as  pain  cost.  But  later  this  position 
was  abandoned ;  and  it  is  clear  enough,  if  the  case  is  looked 
at  from  the  point  of  view  of  the  employer — whether  as 
outlay  cost  to  the  borrowing  entrepreneur,  or  as  either 
investment-opportunity  or  production-opportunity  cost  to 
the  capitalist  employer — that  interest  and  wages  must  be 
regarded  as  upon  the  same  footing. 

•  And  as  we  have  seen,  this  is  not  infrequently  the  point 
of  view  of  cost  adopted  by  Smith.  For  example,  in  chap- 
ter vii  he  sets  forth  natural  price  (normal  exchange 
value)  as  the  general  average  of  "what  it  really  costs  the 
person  who  brings  it  to  market."  But  at  the  same  time  this 
price  must  cover  the  profit  which  the  producer  could  else- 
where have  made;  "If  he  sells  at  a  price  which  does  not 
allow  him  the  ordinary  rate  of  profit  in  his  neighborhood, 
he  is  evidently  a  loser  by  the  trade ;  since  by  employing  his 
stock  in  some  other  way  he  might  have  made  that  profit ;" — 
opportunity  cost.^ 

His  profit,  besides,  is  his  revenue,  the  proper  fund  of  his  sub- 
sistence. As,  while  he  is  preparing  and  bringing  the  goods  to 
market,  he  advances  to  his  workmen  their  wages,  or  their  subsist- 
ence; so  he  advances  to  himself,  in  the  same  manner,  his  own 
subsistence Unless  they  yield  him  this  profit,  therefore,  they 

*  Adam  Smith,  op.  cit.,  chap.  vi. 

^  While  there  is  no  doubt  that  Smith  in  many  places  adopts — and 
never  in  terms  repudiates — this  entrepreneur-cost  point  of  view,  it  is 
equally  clear  that  at  other  times  he  as  definitely  accepts  and  emphasizes 
the  labor-pain  and  the  labor-value  doctrines.  Whittaker  certainly  goes 
much  too  far  in  the  following :  "As  a  theory  of  value  ....  Adam 
Smith  left  us  an  early  form  of  the  law  of  entrepreneur's  cost  and  a 
labor-command  measure  of  value.  But  he  disowns  what  is  naturally 
thought  of  as  the  genuine  classical  theory  of  value,  that  labor  cost 
regulates  market  value.  This  theory  was  Ricardo's  and  really  his 
alone." — Albert  C.  Whittaker,  History  and  Criticism  of  the  Labor 
Theory  of  Value  in  English  Political  Economy,  Vol.  XIX,  No.  2,  of 
"Columbia  University  Studies,"  p.  31. 


24  VALUE  AND  DISTRIBUTION 

do  not  repay  him  for  what  they  may  very  properly  be  said  to  have 
cost  him. 

The  natural  price  must,  then,  also  recoup  him  for  these 
expenses  of  living — an  employer's  subsistence  or  standard- 
of-living  cost.  True,  he  may  not  get  this  price,  but  this  is 
the  lowest  price  "at  which  he  is  likely  to  sell — for  any  con- 
siderable time." 

But  this  subsistence-cost  doctrine  does  not,  after  all, 
appear  to  Smith  quite  to  suffice ;  the  price  is  set  forth  as 
safely  to  be  assumed  as  the  lowest  long-time  price  only 
upon  the  assumption  that  there  is  freedom  of  changing 
occupations.  But  where  such  freedom  exists,  it  is  really  the 
principle  of  displacement  that  is  being  appealed  to;  these 
possible  alternatives  of  employment  offer  a  typical  example 
of  opportunity  cost. 

In  this  chapter  vii  consistent  account  first  begins  to  be 
taken  of  the  fact  that  capital  and  land  are  important  agents 
in  the  productive  process.  Henceforward,  the  talk  of 
homogeneity  in  productive  powers  ceases;  henceforward, 
the  discussion  mostly  goes  on  the  basis  of  employer's  cost 
as  against  pain  or  time  cost;  the  doctrine,  so  far  as  con- 
sciously formulated,  is  that  of  outlay  cost,  and  in  the  main, 
impliedly  as  well  as  consciously,  is  outlay  cost  as  against 
opportunity  cost. 

And  so,  in  addition  to  the  claims  of  the  capitalists,  "as 
soon  as  the  land  of  any  country  has  all  become  private 
property,  the  landlords  ....  demand  a  rent  even  for  the 
natural  produce.  The  laborer  ....  must  then  give  up  to 
his  landlord  a  portion  of  what  his  labor  either  collects  or 
produces." 

Now  here,  again,  the  land  is  conceived  as  passive  oppor- 
tunity rather  than  as  productive  agent ;  the  laborer  is  repre- 
sented as  giving  up  a  part  of  what  in  its  entirety  his  own 
labor  has  produced.  "This  portion,  or  what  comes  to  the 
same  thing,  the  price  of  this  portion,  constitutes  the  rent  of 
the  land,  and  in  the  price  of  the  greater  part  of  commodities 
makes  a  third  component  part."  So,  from  the  point  of  view 
of  outlay  cost  and  of  exchange  value,  rent,  like  interest, 
disturbs  the  labor-cost  principle  as  a  causal  and  determi- 


ADAM  SMITH  25 

nant  fact  for  exchange  relations,  unless,  indeed,  it  be  pos- 
sible to  regard  land  and  capital  as  substitutes  for  labor  and 
as,  so  far,  making  labor  unnecessary  to  be  done  or  to  be 
paid  for.  Formally,  this  would,  perhaps,  imply  no  lack  of 
loyalty  to  the  labor  standard,  loyalty,  however,  not  to  labor 
in  terms  of  pain,  but  solely  to  labor  in  terms  of  pain  or  of 
something  instead  of  pain ;  nor,  indeed,  is  it,  in  last  analysis, 
an  insistence  upon  labor  in  any  aspect,  but  only  upon  some- 
thing, production-wise,  a  substitute  for  labor.  And  if  this 
interchange  between  labor  and  substitutes  is  accepted  as 
possible,  it  should  be  equally  open  to  reverse  the  process  and 
to  regard  labor  as  the  substitute  for  land  or  capital  services, 
thus  reducing  all  costs  to  equivalents  in  rent  or  interest. 
But  this  comes  perilously  near  to  surrendering  the  whole 
labor-cost  position,  and  to  adopting  in  its  entirety  the  out- 
lay-cost point  of  view. 

But — and  now  we  come  to  an  example  of  Smith's  treat- 
ment of  labor  as  value  standard  or  measure — nothing  of  all 
this  necessarily  bears  to  disturb  labor  as  the  best  and  per- 
haps the  only  medium  of  expression  and  common  denomi- 
nator of  real  value. 

The  real  value  of  all  the  different  component  parts  of  price,  it 
must  be  observed,  is  measured  by  the  quantity  of  labor  which  they 
can,  each  of  them,  purchase  or  command.  Labor  measures  the 
value,  not  only  of  that  part  of  price  which  resolves  itself  into 
labor,  but  of  that  part  which  resolves  itself  into  rent,  and  of  that 
part  which  resolves  itself  into  profit. 

Here  evidently,  the  thought  is  simply  and  purely  one  of 
measure — of  standard — and  not  of  cause.  But  a  shift  in 
concepts  has  nevertheless  taken  place — a  shift  later  to  be 
exploited  at  the  full  by  Malthus — from  labor  as  the  basis  of 
value  by  virtue  of  the  labor-pain  investment,  to  labor  as 
basis  in  terms  of  pain-purchasing  power  or  of  pain-avoid- 
ing power — ultimately,  therefore,  of  service-rendering 
power.^ 

'  Thus  the  following  states  only  one  of  the  two  positions  held  by 
Smith  with  regard  to  the  labor  standard :  "To  Smith,  labor  is  the 
great,  homogeneous,  undifferentiated  common  denominator  to  the 
wonderfully  diverse  mass  of  goods  which  come  into  existence  out  of  it, 
and  the  value  or  'real  worth'  of  each  of  these  goods  follows  the 
quantity  of  the  source-stuff  turned  to  its  production." — Whittaker, 
op.  cit.,  p.  34. 


26  VALUE  AND  DISTRIBUTION 

In  chapter  vii  it  is  written  that, 

when  the  price  of  any  commodity  is  neither  more  nor  less  than 
what  is  sufficient  to  pay  the  rent  of  the  land,  the  wages  of  the 
labor,  and  the  profits  of  the  stock  employed  in  raising,  preparing, 
and  bringing  it  to  market,  according  to  their  natural  rates,  the 
commodity  is  then  sold  for  what  may  be  called  its  natural  price. 

There  is  here  no  attempt  to  explain  these  natural  rates, 
either  as  costs  to  the  employer  or  as  incomes  to  the  owners ; 
they  are  simply  normal  or  natural  rates,  and  the  produced 
commodities  incorporate  these  rates  into  the  natural  cost, 
with  the  result  that  the  corresponding  price  is  the  natural 
price.  There  is  here,  however,  unconsciously  but  neces- 
sarily implied  an  opporttmity-cost  analysis,  as  the  explana- 
tion of  these  existing  rates  of  compensation  to  which,  as 
costs,  the  production  of  every  particular  commodity  is 
subject.  And  this  opportunity  doctrine  is,  in  fact,  recog- 
nized, so  far  as  the  employers'  profits  are  concerned : 

Though  in  common  language  what  is  called  the  prime  cost  of 
any  commodity  does  not  comprehend  the  profit  of  the  person  who  is 
to  sell  it  again,  yet  if  he  sells  it  at  a  price  which  does  not  allow 
him  the  ordinary  rate  of  profit  ....  he  is  evidently  a  loser  by 
the  trade ;  since  by  employing  his  stock  in  some  other  way  he  might 
have  made  this  profit. 

But  in  the  paragraph  next  following  appeal  is  made, 
as  we  have  already  seen,  to  the  doctrine  of  subsistence  cost: 

While  he  is  preparing  and  bringing  the  goods  to  market  he 
advances  to  the  workmen  their  wages,  or  their  subsistence ;  so  he 
advances  to  himself  in  the  same  manner  his  own  subsistence  which 
is  generally  suitable  to  the  profit  which  he  may  reasonably  expect 
from  the  sale  of  his  goods. 

It  is  now  to  be  remarked  that  here  the  standard  is  one 
not  of  necessary  subsistence,  nor  accurately  one  of  permanent 
and  established  standard  of  living,  but  a  sort  of  short-time 
standard  based  upon  the  expected  profit :  but  the  stand- 
ard serves  for  the  purposes  in  hand  as  does  the  laborer's 
wage ;  it  is  the  amount  necessarily  paid,  or  at  all  events  the 
amount  actually  paid  to  one  of  the  producing  agents — out- 
lay cost.  However,  Smith  is  not  faithful  to  this  concept; 
nor  can  he  well  be  so,  for  evidently  one  is  not  held  to  con- 
sume all  of  his  profits ;  and  whether  he  does  or  does  not 
consume  them  all,  and  whether  they  are  great  or  small,  it  is 


ADAM  SMITH  27 

probable  that  he  will  take  them  if  they  are  the  best  that  he 
can  get. 

If  at  any  time  it  [the  supply]  exceeds  the  effectual  demand, 
some  of  the  component  parts  of  the  price  must  be  paid  below  the 
natural  rate.  If  it  is  rent,  the  interests  of  the  landlords  will 
immediately  prompt  them  to  withdraw  a  part  of  their  land;  if  it 
is  wages  or  profits,  the  interests  of  the  laborers  in  the  one  case 
and  of  their  employers  in  the  other,  will  prompt  them  to  withdraw 
a  part  of  their  labor  or  capital  from  this  employment." 

This  is  opportunity  cost  so  extended  as  to  include  all 
forms  of  outlay  of  productive  goods  or  for  productive  goods, 
rent  included;  and  the  same  argument  is  applied  in  reverse 
order  to  higher  prices.  Smith  proceeds:  "The  natural 
price  is,  as  it  were,  the  central  price,  to  which  the  prices 
of  all  commodities  are  naturally  gravitating." 

However,  Smith's  ideas  as  to  the  relation  of  rent  to  cost 
and  to  price  were  especially  and  notoriously  vague  and 
vacillating.  In  chapter  ix,  the  rent  of  land,  these  notions 
of  outlay  cost  and  opportunity  cost  get,  so  far  as  rent  out- 
lays are  concerned,  a  serious  back-set : 

Rent  enters  into  the  composition  of  the  price  of  commodities 
in  a  different  way  from  wages  and  profit.  High  or  low  rent  is 
the  effect  of  it.  It  is  because  high  or  low  wages  or  profit  must  be 
paid  in  order  to  bring  a  particular  commodity  to  market  that  its 
price  is  high  or  low ;  but  it  is  because  its  price  is  high  or  low,  a 
great  deal  more  or  a  little  more  or  no  more  than  what  is  sufficient 
to  pay  the  wages  and  profits,  that  it  affords  a  high  rent  or  low 
rent  or  no  rent  at  all. 

This  distinction  between  rent  outlays  and  other  outlays 
can  evidently  not  greatly  signify  from  the  point  of  view  of 
outlay  cost.  But  there  is  another  point  of  view  from  which 
the  distinction  is  important.  Rent  arises  only  as  a  question 
of  individual  and  competitive  cost.  Socialized  production 
would  meet  with  land  differentials,  but  the  aggregate  prod- 
uct would  stand  as  the  aggregate  remuneration  for  the 
total  social  outlay  and  effort :  some  of  the  product  would,  it 
is  true,  have  required  less  outlay  than  other;  but  if  any  sys- 
tem of  exchanging,  by  barter  or  otherwise,  existed,  these 
differences  in  land  quality  could  have  no  significance  for 
the  terms  of  the  exchanges ;  nor  could  they  figure  as  addi- 
tions to  cost;  at  the  most,  as  differentials,  they  would  only 

'  Adam  Smith,  op.  cit.,  chap.  vii. 


28  VALUE  AND  DISTRIBUTION 

be  differentials  of  saved  cost.  But  in  a  competitive  society 
these  differentials  of  productivity  have  to  be  paid  for  under 
the  guise  of  outlays  made  for  the  privilege  of  enjoying 
them.  So  again,  but  for  a  different  purpose,  we  return  to 
the  distinction  between  competitive  and  collective  cost. 
Every  improvement  in  production,  whether  of  developing 
technique,  or  of  better  land,  or  of  more  abundant  land,  or 
of  better  capital  or  more  abundant  capital,  is,  from  the 
social  point  of  view,  the  occasion  and  cause  of  diminished 
labor  cost — a  larger  product  for  a  given  total  of  production 
burden.* 

*  Note,  however,  that  this  discussion  of  collectivist  labor  cost 
has  in  view  only  such  productivity  differentials  as  concern  only  one 
line  of  products.  But  commonly,  of  course,  differentials  of  quality  for, 
say,  wheat  production  are  accompanied  by  differentials  for  other  lines 
of  product.  In  such  cases  another  cost  computation  requires  attention 
in  the  collectivist  reckoning.  Displacement  cost — opportunity  cost- 
is  really  the  leading  and  almost  the  exclusive  form  of  cost  for 
collectivist  economics.  Labor  cost  is,  in  fact,  of  extremely  small 
significance,  excepting  in  this  aspect  of  alternative  applications.  All 
that  the  text  intends  to  assert  is  that  instrumenal  differentials  of 
productivity  for  any  one  line  of  production  can  have  no  significance 
in  collectivist  computations. 


CHAPTER  III 
RICARDO 

At  the  present  day  it  is  a  task  neither  of  great  difficulty 
nor  of  great  merit  to  convict  Adam  Smith  of  inconsistency 
and  even  of  direct  contradiction.  Were  the  purposes  here 
in  view  essentially  those  of  criticism,  it  would  thereby  be 
the  more  necessary  to  keep  in  mind  that  the  strength  of 
Adam  Smith  lay  in  his  breadth  of  information,  his  accuracy 
of  observation,  his  suggestiveness  of  comment,  and  his 
catholicity  of  doctrine.  He  was  not  in  his  time,  and  could 
hardly  have  been  in  any  time,  a  close  worker  in  systematic 
theory:  He  failed  to  see  the  town  for  the  houses,  the 
forest  for  the  trees ;  but  he  knew  wondrous  well  the  houses 
and  the  trees.  His  habit  of  mind  was  concrete  and  prac- 
tical. Despite,  however,  this  consistent  practicality,  almost 
every  theoretical  aspect  of  every  question  struck  him  at  one 
time  or  another.  In  economic  doctrine,  as  has  been  said  of 
Shakespeare  in  observation  of  life,  the  ocean  of  his  sympathy 
lapped  all  the  isles  of  thought.  For  the  present  purposes, 
therefore,  which  are,  in  the  main,  expository  and  analytic 
rather  than  historical  or  critical,  Adam  Smith  offers  an 
incomparable  field  for  profitable  discussion  and  illustration. 

Not  precisely  so  with  Ricardo  or  with  his  contem- 
poraries, Malthus,  James  Mill,  and  MacCulloch.  Ricardo 
was  in  purpose  and  method  a  systematizer,  with  a  theorem 
to  expound  and  a  theory  to  establish ;  consistency  and  logi- 
cal coherence  were  parts  of  the  task  to  which,  despite  slight 
equipment  in  style  and  in  expository  skill,  he  had  set  him- 
self; and  in  this  purpose,  so  far  as  consistency  and  logical 
unity  were  concerned,  he  was,  on  the  whole,  surprisingly 
successful.  His  defects  of  exposition,  however,  render  the 
task  of  interpretation  especially  difficult:  it  may  thus  be 
possible  that  one  more  attempt  at  restatement  and  reinter- 

29 


30  VALUE  AND  DISTRIBUTION 

pretation  of  his  doctrine  may  be  serviceable,  even  after  the 
sympathetic  and  masterly  and,  in  the  main,  definitive  study 
of  Mr.  E.  C.  K.  Gonner.i 

Very  confusing  in  Ricardo's  discussion  is  the  fact  that 
there  are  two  senses  for  each  of  the  terms  zvlue  and  I'aluc 
of  labor;  value  meaning  (i)  real  value,  in  the  sense  of 
labor-investment  value — concreted  pain  cost;  (2)  power 
in  exchange.  Value  of  labor  sometimes  means  ( i )  mere 
exchange  power,  market  value  of  labor;  (2)  labor  as  a 
ratio  to  profit,  a  distributive  fraction,  a  relative  share  in  a 
product  the  absolute  value  of  which  is  irrelevant  to  the 
concept. 

And  thus  with  regard  to  the  famous  proposition  that 
neither  wages  nor  profits  can  rise  or  fall  unless  to  the 
corresponding  loss  or  gain  of  the  other  factor,  James  Mill 
makes  it  clear  that  this  is  never  asserted  by  Ricardo  except 
in  the  sense  of  relative  shares : 

If  a  change  in  the  amount  of  commodities  is  meant,  it  will 
not  be  true,  in  that  sense,  that  profits  so  depend  upon  wages  as  to 
fall  when  wages  rise,  and  rise  when  wages  fall ;  for  both  may  fall 
and  both  may  rise  together.  And  this  is  a  proposition  which  no 
political  economist  has  ever  called  in  question.^ 

But  note  that  in  the  sense  neither  of  exchange  power  nor 
of  ratio  shares  does  Ricardo  commit  himself  to  the  doctrine 
that  the  value  of  the  labor  is  derived  from  the  value  of  the 


^  All  references  are  to   Conner's  edition  of  Ricardo. 

^  James  Mill,  Elements  of  Politico!  Economy  (3d  ed.,  London, 
1844),  chap,  ii,  sec.   3. 

"Ricardo   never  asserts   or   imagines   that   wages   and  profits   cannot 
increase   together,   so   far   as   the   amount   of   commodities    that   measure 
them   is   concerned.    .....    What   he  denies   is   that   one   can   obtain   a 

larger  share  of  the  total  value  without  the  other  experiencing  a 
diminution  in  its  share." — Conner  (Ricardo)  :  "Introductory  Essay," 
sec.  15. 

"Each  commodity  represents  a  certain  amount  of  force,  and  thus 
the  total  quantity  produced  represents  the  total  force  of  the  country. 
Should  invention  facilitate  production  ....  each  commodity  subject 
to  the  invention  must  cease  to  represent  as  great  an  amount  of 
force ;  ....  in  other  words,  its  real  value  would  be  less." — Ibid., 
sec.  9. 


RICARDO  31 

product.  His  is  consistently  a  cost-of-production  view. 
But  he  equally  carefully  avoids  making  the  exchange  value 
of  the  labor  the  cause,  through  costs,  of  the  exchange  rela- 
tions of  the  products.  He  does  not  deny  that  labor  has 
value ;  this  is  as  clear  as  that  land  has  value :  but  with 
land  he  denies,  and  with  labor  he  declines  to  assert,  any 
cost-causal  relation.  To  grasp  this  point  is  crucial  to  any 
right  understanding  of  Ricardo.  He  has  no  explanation 
for  the  value  of  labor  excepting  by  the  necessities  of  living 
according  to  the  established  standard,  a  sort  of  cost  doc- 
trine for  labor.  He  terms  labor  the  "foundation  of 
exchange  value ;"  it  is  the  very  essence  and  significance  of 
real  value.  Exchange  values  are  merely  proportional  to 
real  values.  "The  connection  between  exchange  value  and 
so-called  real  value  is  simple.  On  the  degree  to  which  a 
commodity  as  compared  with  other  commodities  is  pos- 
sessed of  the  latter,  depends  its  position  in  the  ratio  of 
exchange."  ^ 

Labor  is  conceived  by  Ricardo  as  a  leveler  of  exchange 
value,  and  this  solely  through  the  efforts  of  holders  of  it  or 
of  purchasers  of  it  to  apply  it  at  the  maximum  of  advan- 
tage. It  is  true  that  the  working-out  of  this  by  entrepre- 
neurs is  in  terms  of  cost  to  them  but,  according  to  Ricardo, 
their  computations  do  not  express  the  ultimate  fact;  cost 
is  not  decisive  excepting  in  this  sense  of  proportionment ; 
production  costs  in  the  ordinary  sense  depend  upon  real 
costs,  that  is,  upon  the  c|uantity  of  labor  applied ;  and  so 
the  doctrine  formulates,  value :  value ::  cost  (=labor)  : 
cost  (^abor).  And  it  thus  comes  about  that  labor,  the 
basis  and  essence  of  real  value,  may  serve  as  a  standard  and 
common  denominator  of  exchange  value.  In  final  analysis, 
labor  does  not  determine  value  through  its  own  value,  but 
merely  determines,  by  the  proportion  of  it  incorporated  in 
different  commodities,  the  relations  of  exchange  value 
between  these  commodities.  Labor  might  halve  or  double 
in  productive  power,  and  yet  no  effect  be  felt  in  the  ratios 

^  Ibid.,  sec.  9. 


32  VALUE  AND  DISTRIBUTION 

of  exchange.     So  wages  might  vary  indefinitely  in  rise  or 
fall  without  modifying  these  market  relations: 

No  alteration  in  the  wages  of  labor  could  produce  any  altera- 
tion in  the  relative  value  of  these  commodities The  same 

reasons  which   should  make   the  hunters   and  fishers   endeavor   to 
raise  the  value  of  their  game  and  fish  would  cause  the  owner  of  the 

mines  to  raise  the  value  of  his  gold The  relative  situation 

being    the    same    before    and    after    the    rise    of    wages,    the    rela- 
tive ....  value  would  remain  unaltered.* 

But  if  the  labor  quantities  change  relatively,  changes 
will  follow  in  value. 

Every  improvement  in  machinery,  in  tools,  in  buildings,  in  rais- 
ing the  raw  material,  saves  labor  and  enables  us  to  produce  the 
commodity  to  which  the  improvement  is  applied,  with  more  facility, 
and  consequently  its  value  alters." 

In  what  direction  Ricardo  would  look  for  the  explana- 
tion of  all  this  may  not  be  clear ;  but  it  is  certain  that  he 
does  not  find  it  in  any  invariability  in  the  value  of  labor. 
Labor  does  vary  both  in  ratio  value,  its  share  relative  to 
profit,  and  in  commodity-purchasing  power,  its  exchange 
value : 

Therefore  it  cannot  be  correct  to  say  with  Adam  Smith  "that 
as  labor  may  sometimes  purchase  a  greater  and  sometimes  a 
smaller  quantity  of  goods,  it  is  their  value  that  varies," — ^but  it  is 
correct  to  say  that  the  proportion  between  the  quantities  of  labor 
necessary  for  acquiring  different  objects  seems  to  be  the  only  cir- 
cumstance which  can  afford  any  rule  for  exchanging  them  for  one 
another.' 

Nor  would  Ricardo  have  concurred  in  the  assertion  of 
an  invariable  real  x'alue  in  labor;  but  only  of  invariability 
in  the  exchange  relations  of  things  invariable  in  their  rela- 
tive labor  content.  Labor  value  as  reality  in  contra-distinc- 
tion  to  labor  value  as  an  exchange  fact,  Ricardo  did  not 
recognize,  or,  for  that  matter,  deny ;  he  had  no  need  for  the 
distinction.     For  any  purpose  of  his  the  value  of  labor  is 

*  Ricardo,    Political   Economy,    chap,    i,    sec.    3,    par.    16. 

^  Ibid.,  chap,  iv,  par.   18. 

^  Ibid.,  chap,  i,   sec.    i,  par.    10. 


RICARDO  33 

variable ;  "being  not  only  affected  as  other  things  are  by  the 
proportion  between  supply  and  demand  ....  but  also  by 
the  varying  prices  of  food  and  other  necessaries  on  which 
the  wages  of  labor  are  expended."  '^ 

But  how  does  this  proportion  doctrine,  this  function  of 
labor  as  a  leveler  of  values,  come  to  be  in  any  sense  a  cost 
doctrine,  or  justify  the  repute  of  Ricardo  as  the  great  cost- 
of-production  theorist?  As  generally  interpreted,  and  by 
his  own  express  assertion,  he  holds  that  the  value  of  any 
given  article  depends  upon  its  cost  of  production ;  but  the 
connection  between  labor  cost  and  cost  of  production  in 
the  sense  of  outlay  cost  comes  about  through  the  entrepre- 
neur working-out  of  the  proportion  principle.  As  regards 
the  value  of  any  one  commodity,  its  cost,  its  selling-price, 
the  mere  outlay  investigation  would  be  an  adequate  solu- 
tion ;  with  wages  so  much,  materials  so  much,  etc.,  the  price 
would  have  to  be  so  much.  But  Ricardo  was  attempting 
to  see  the  value  problem  whole,  not  merely  as  a  question  of 
this  commodity  or  that,  considered  separately — a  purely 
individualist-entrepreneur  standpoint — but  of  all  commodi- 
ties taken  together  in  their  interrelations  of  exchange.  For 
this  purpose  the  various  cost  outlays  would  not  serve  as  a 
basis  of  explanation,  but  would  themselves  be  simply  so 
many  more  items  of  fact  awaiting  each  its  separate  explana- 
tion. 

Summarizing,  therefore,  the  case  as  thus  far  stated,  we 
may  say  that  Ricardo  makes  labor  important  only  as  the 
basis  and  inner  meaning  of  real  value.     The  doctrine  of 

''Ibid.,  chap,   i,    sec.    i,    par.    g. 

In  view  of  Ricardo's  distinction  between  value  and  riches,  as  set 
forth  in  chapter  xx,  it  must  be  admitted  that  the  above  interpretation 
might  fairly  be  questioned.  But  in  a  letter  to  Say,  dated  January  2,  1820, 
Ricardo  writes :  "You  seem  to  me  to  have  misunderstood  one  of  my 
propositions.  I  do  not  say  that  it  is  the  value  of  labor  that  determines 
the  value  of  the  product ;  this  is  a  view  which  I  am  trying  with  all  my 
power  to  refute.  I  say  that  it  is  the  comparative  quantity  of  labor 
necessary  to  production  which  determines  the  relative  value  of  prod- 
ucts." [This  is  translated  from  the  French  ;  I  have  not  been  able  to 
place  my  hand  upon  the  original,  which  I  take  to  have  been  in 
English.] 


34  VALUE  AND  DISTRIBUTION 

real  value  is  still  everywhere  a  cost  doctrine  of  the  labor 
sort;  the  purpose  of  activity  is  to  secure  pleasure  or  to 
avoid  pain ;  in  either  case,  pain  is  the  method  and  the  price 
of  attainment,  the  cost,  and  thereby  an  expression  of  the 
value  of  the  thing  or  fact  attained,  or  of  the  external  agent 
or  implement  affording  it.  Thus  it  comes  about  that 
Ricardo  distinguishes  sharply  between  riches  and  real 
value;  with  riches  the  emphasis  is  upon  quantity  of  utility, 
of  weal ;  with  value,  upon  cost. 

All  of  this,  as  we  have  seen,  falls  under  the  head  of 
real  value.  But  for  exchange  value  he  recognizes  that, 
even  in  the  simplest  cases,  labor  gives  only  a  method  of 
arriving  at  relations  between  commodities,  their  exchange 
ratios ;  it  is  a  measure  in  this  sense  only,  and  comes  to  serve 
as  such  only  through  the  leveling  influence  of  costs,  by 
virtue  of  the  constant  tendency  on  the  part  of  producers  to 
apply  labor  at  its  greatest  advantage.  Pain  cost  has  here 
nothing  to  do  with  the  case,  excepting  as  pain  may  have 
something  to  do  with  the  sums  which  must  be  paid  for 
labor  in  order  to  get  it.  Neither  labor,  nor  pain  as  in 
some  way  implied  in  labor,  has  any  significance  for 
exchange  value  otherwise  than  as  standard  or  measure  or 
common  denominator.  An  indirect  significance  is  worked 
out  only  through  the  leveling  or  proportioning  mechanism.^ 

In  point  of  fact,  with  all  the  Ricardian  group,  as  with 
Smith,  the  desideratum  in  the  exchange-value  prob- 
lem was  to  get  at  a  measure ;  the  real-value  doctrine  was 

*  In  the  light  of  the  foregoing,  sharp  dissent  must  be  expressed 
from  the  view  of  Ricardo  held  by  Whittaker :  "Ricardo  contributed 
very  little  to  the  advancement  of  the  empirical,  that  is,  the  entre- 
preneur account  as  such.  The  direct  line  of  descent  of  this  doctrine  is 
traceable  from  Smith's  Wealth  of  Nations  through  the  Principles  of 
Malthus  and  J.   S.  Mill  to   Marshall.     Neither  Ricardo  nor   Cairnes  can 

be  considered  to  stand  in  the  line Ricardo  never  stated  a  law 

of  entrepreneurs'  cost  plainly,  formally,  as  such,  though  he  gave  it  an 
obscure  recognition  as  a  source  of  difficulty  to  the  pure  labor  theory 
of  value"  (Whittaker,  op.  cit.,  pp.  14,   15). 

The  following  apjiears  to  be  by  much  the  more  accurate  state- 
ment: "Ricardo's  real  conception  of  normal  value  is  this:  the  total 
cost  of  a  commodity  determines  the  total  wages  charges  that  must  be 
paid  by  the  entrepreneur,  or  series  of  entrepreneurs,  producing  it" 
(ibid.,  p.  51). 


RICARDO  35 

sufficient  for  more  fundamental  consideration  of  causes, 
and  as  bottoming  economics  upon  some  final,  definitive,  and 
underlying  substratum  of  reality.  If  land,  the  Physiocratic 
basis,  was  discarded,  what  else  could  serve,  if  it  were  not 
labor?  In  view  of  the  comparative  utility  of  water  and 
wine,  or  of  corn  and  gold,  and  in  the  absence  of  any  notion 
of  marginal  utility,  utility  could  not  serve  for  the  case — 
whether  or  not  we  shall  now  say  that  the  required  homo- 
geneity has  later  come  with  the  marginal  notion.  And  even 
if  utility  could  have  been  made  to  apply,  this  was  not  that 
bed-rock  of  reality  which  was  in  quest.  And  so  much  the 
more  this  search  for  the  ultimate  could  not  content  itself 
with  simple  exchange  ratios.  Ratios  of  what?  Determined 
by  what?  A  mere  ratio  of  exchange  was  as  if  a  man  should 
stand  firmly,  resting  neither  on  one  leg  nor  on  the  other, 
but^  held  upright  by  the  mutual  support  of  the  two.  Possibly 
the  situation  was  of  this  sort  for  the  moving  equilibrium  of 
the  heavenly  bodies — tied  to  nothing  arid  upheld  by  nothing 
— but  if  so  it  was  admittedly  not  greatly  to  their  credit. 
The  only  exit  from  the  dilemma  appeared  to  be  by  the 
way  of  labor,  as  definitive  and  real,  causal  and  determi- 
native. 

But  for  exchange  value,  nothing  of  the  sort  was  claimed 
for  labor,  but  only  that  it  was  adapted  to  serve  in  the 
second  of  Adam  Smith's  roles,  that  of  value  denominator.^ 

It  must  now  be  admitted  that  Ricardo's  essential  posi- 
tion  that   commodities   rise   or    fall    in   exchange   value   in 

°  Malthus  concurring  in  this  notion  that  a  common  measure  for 
value  must  be  discovered,  and  that  labor  offered  the  only  hope,  was  yet 
disposed  to  disagree  with  Ricardo  and  to  adopt  not  the  common 
denominator  of  labor  in  the  cost  aspect — ^by  test  of  what  had  been 
done,  a  sj'stem  of  byegones — but  by  the  forward-looking  method  of 
what  the  product,  once  produced,  would  command  in  labor  or  in  the 
products  of  labor. 

For  clearly,  said  Malthus,  if  a  manufacturer  really  makes  a 
profit,  he  must  get  back  for  his  product  the  power  to  control  more 
productive  energies  than  he  put  into  his  commodity.  If  the  less  labor 
of  today  will  now  do  the  work  of  the  more  of  yesterday,  an  equal  con- 
trol of  labor  must  imply  a  profit.  It  is  the  purchasing  power  of  any 
product  that  really  signifies  to  the  producer  of  it,  and  if  labor  is  agreed 
to  be  the  measure-medium,  it  should  be  so  in  the  sense  of  labor- 
purchase  rather  than  of  labor-investment.  True,  these  quantities  may 
commonly  coincide,  but  if  the  coincidence  fails,  the  preference  should 
be  accorded  to  purchasing  power. — T.  R,  Malthus,  Political  Economy, 
chap.  i. 

Possibly  so  ;  but  it  is  sufficient,  for  our  present  purposes,  to  point 
out  that  Malthus*  is  here  vaguely  feeling  toward  the  utility  measure  of 
value  ;  that  is  to  say,  his  doctrine  is  fundamentally  not  a  cost  doctrine. 


36  VALUE  AND  DISTRIBUTION 

proportion  to  the  rise  or  fall  in  the  labor  requirement  in 
their  production  would  hold,  if  (i)  labor  could  be  reduced 
to  homogeneity  excepting  in  terms  of  value  productivity, 
and  if  (2)  the  doctrine  could  be  made  to  account  adequately 
for  the  roles  of  land  and  of  capital  in  production. 

As  to  land,  Ricardo  felt  no  considerable  difficulty.  He 
ruled  rent  out  of  the  problem,  by  a  course  of  reasoning 
familiar  to  all  economists  and  still  commonly  accepted.  It 
is  unnecessary  to  inquire  here  whether  modern  theory  has 
done  well  in  accepting  this  Ricardian  doctrine  as  to  the 
relation  between  rent  costs  and  values — there  is  much  wait- 
ing to  be  said  in  this  regard, — but  it  is  certain  that  Ricardo 
did  not  do  well  in  attempting  to  fit  this  doctrine  into  his 
general  system.  His  doctrine  of  cost  was  one  of  competitive 
and  not  of  collectivist  cost;  it  was  worked  out  in  terms  of 
entrepreneur  competitions  by  the  sheer  necessity  of  its 
character  as  competitive ;  the  doctrine  of  the  proportion- 
ment  of  value  to  labor,  the  leveling  doctrine,  finds  its  basis 
in  the  principle  that  each  entrepreneur  will  use  his  costs,  as 
a  total,  in  the  way  to  get  from  them  the  greatest  total  of 
exchange  power.  In  short,  Ricardo's  doctrine  of  propor- 
tion was  worked  out  through  the  entrepreneur  mechanism 
and  was  nothing  more  or  less  than  competitive  opportunity 
cost;  and  had  he  only  furnished  the  doctrine  forth  with  an 
apparatus  of  margins  and  of  producers'  differentials,  and 
had  he  disposed  of  rent,  as  well  as  of  interest,  by  frankly 
and  freely  making  room  for  both  within  his  formula,  much 
in  modern  value  theory  might  have  been  other — and  better 
— than  it  is  today." 

However,  there  would  of  course  have  remained  the  old 
difficulty  about  the  homogeneity  of  labor;  and  a  new  diffi- 
culty would  forthwith  have  arisen — how  to  make  land  costs 
homogeneous  with  labor  costs,  otherwise  than  on  the  seem- 
ingly   question-begging    value    basis.      And  then,    again, 

^^  Malthus'  view  was  more  consistently  in  line  with  the  entre- 
preneur-cost concept :  "It  appears  to  me  essential  ....  to  say  that 
the  cost  of  producing  any  commodity  is  made  up  of  all  the  wages,  all 
the  profits,  and  all  the  rents  which  ....  are  necessary  to  bring  that 
particular  commodity  to  market  in  the  quantity  required"  (Malthus, 
op.  cit.,   ist  ed.,  pp.    102,   103). 

"Malthus    proceeds    to    a    thorough    criticism    of    Ricardo's    law    of 

labor  cost There  are   (i)    the  temporary  alterations  of  prices 

too  rapid  to  be  met  by  changing  the  volume  of  production ;  (2) 
monopoly  in  the  product  itself,  or  some  raw  product  used  in  its 
making;  (3)  seasonal  fluctuations  in  all  products  of  the  soil  .  .  .  .  ; 
(4)    the   different   proportions   of  fixed    capital   employed,    the    different 


RICARDO  37 

finally,  the  same  questions  would  immediately  have  pre- 
sented themselves  with  regard  to  capital. 

But  they  presented  themselves  as  it  was.  Ricardo  was 
perfectly  well  aware  that,  in  getting  rid  of  rent,  he  had 
merely  postponed  his  difficulty,  and  that  in  point  of  fact, 
this  difficulty  was  insurmountable.  But  he  had  done  his 
best ;  and  then,  with  his  customary  candor,  a  candor  which 
would  have  done  credit  to  a  trained  scientist,  admitted  that 
this  best  was  not  well. 

Not  so  with  his  disciples,  MacCulloch  and  James  Mill. 
Ricardo's  argument  appealed  to  them  as  wholly  satisfac- 
tory ;  they  were  unable  to  appreciate  the  difficulty  which 
Ricardo  himself  felt  with  it.  For  is  it  not  clear  that  mid- 
way between  man  and  environment,  labor  and  land,  there 
are  those  modifications  in  environment — new  items  of 
environment — due  to  the  activity  which  men  have  exerted 
in  their  traffic  with  the  original  endowment?  Genetically 
speaking,  capital  is  mere  stored-up  labor,  and  that  part  of 
the  entire  productive  output  of  society  that  is  due  to  capital 
is,  in  last  analysis,  it  was  said,  rightly  to  be  ascribed  to 
labor ;  interest  is  therefore  indirect  wages. 

Taking  the  hunter  illustration,  Ricardo  had  formulated 
the  argument  as  follows : 

Value  is  regulated  not  solely  by  the  time  and  labor  [directly] 
necessary,  ....  but  also  by  the  time  and  labor  necessary  for  pro- 
viding the  hunter's  capital,  the  weapons ;  [so  if]  the  weapon  neces- 
sary to  kill   the  beaver   was   constructed   with  ....  more   labor 

than,  etc.,  the  beaver  would  be  of  more  value  than  two  deer 

The  same  principle  would  hold  true,  that  the  exchangeable 
value  of  the  commodities  produced  would  be  in  proportion  to  the 
labor  bestowed  on  their  production ;   not  on  their  immediate  pro- 


quickness  of  the  returns  of  the  circulating  capital;  (5)  the  quantity 
of  foreign  commodities  used  in  manufactures ;  (6)  the  acknowledged 
effects  of  taxation;  (7)  and  the  almost  universal  prevalence  of  rent 
in  the  actual  state  of  all  improved  countries  ;  .  .  .  .  it  is  certainly  not 
the  quantity  of  labor  which  has  been  employed  in  the  production  of 
each  particular  commodity  which  determines  their  relative  values  in 
exchange,  at  the  same  time  and  at  the  same  place  (Malthus,  op.  cit,, 
pp.  104,  1 05).  Ricardo  acknowledged  all  this,  but  the  claim  that 
rent,"  etc. — Whittaker,  op.  cit.,  p.    85. 


38  VALUE  AND  DISTRIBUTION 

duction  only,  but  on  all  those  implements  or  machines  required  to 
give   efifect   to  the  particular   labor   to   which   they  were   applied;" 

and  he  enumerates  as  among  these  other  applications  of 
labor, 

a  portion  of  the  labor  bestowed  on  building  the  ship  in  which  it 
[the  cotton — taking  the  stocking  industry  as  an  example]  is  con- 
veyed, ....  a  portion  of  the  labor  of  the  engineer,  smith,  and 
carpenter  who  erected  the  buildings  and  machinery,  ....  and 
of  many  others  whom  it  is  unnecessary  further  to  particularize. 
The  aggregate  sum  of  these  various  kinds  of  labor  determines  the 
quantity  of  other  things  for  which  these  stockings  will  exchange, 
while  the  same  consideration  of  the  various  quantities  of  labor, 
which  have  been  bestowed  on  these  other  things,  will  equally 
govern  the  portion  of  them  which  will  be  given  for  stockings." 

And  to  show  that  these  same  conclusions  apply  to  the  com- 
modities exchanged  against  the  stockings,  he  inquires  what 
effect  would  be  felt  upon  prices,  if  any  of  the  labor 
processes  were  shortened. 

But  in  paragraph  17  of  the  same  section  he  finds  it 
necessary  to  take  account  of  the  influence  of  time ;  he 
recognizes  that  where  the  capitals  applied  are  not  of  equal 
durability  or  of  similar  sorts,  changes  will  be  worked  in 
exchange  ratios — as,  for  example,  by  differences  in  propor- 
tions of  fixed  as  against  circulating  capital,  subsistence 
goods,  etc.,  where  time  becomes  an  important  element  in 
fixing  profits  on  stock.  And  he  points  out  that  if  different 
commodities  require  different  proportions  of  labor  and 
capital  in  their  production,  changes  in  the  value  of  labor 
must  affect  one  commodity  more  than  another. 

But  note  that  while  this  might  appear  to  regard  labor 
not  only  as  an  equalizer  and  leveler  of  exchange  values, 
but  also  as  somehow  independent  and  as  possessing  in  its 
own  right  a  value  in  such  wise  as  to  make  it  definitely  and 
ultimately  a  cost,  this  would  not  be  a  fair  interpretation  of 
Ricardo's  position.  He  is  reasoning  merely  that  as  sheer 
matter  of  time  and  of  the  corresponding  interest  charges,  or 

"Op.  cit,,  chap,  i,  sec.   3,  pars.    14,   15. 
^"Ibid.,  par.   15. 


RICARDO  39 

as  a  question  of  some  departure — due  perhaps  to  changing 
conditions  with  lapsing  time — of  the  fixed  capital  from  the 
value  level  of  its  labor  cost,  which  departure  he  does  not 
attempt  to  explain,  or  through  changes  in  wage  require- 
ments, due,  we  will  say,  to  subsistence  influences, — com- 
modities may  diflfer  in  exchange  value,  because  of  the  larger 
or  smaller  share  of  fixed-capital  outlays  as  compared  with 
wage  outlays,  or  of  fixed-capital  outlays  as  compared  with 
circulating-capital  outlays.  And  labor,  as  he  often  says, 
may  vary  both  in  exchange  and  in  ratio  value.  But  this 
variability,  as  Ricardo  thought  of  it,  is  especially  of  the 
ratio  sort;  but  in  any  event  this  variation  in  the  relative 
share  in  the  productive  output  must  be  allowed  for  by 
employers  in  combining  labor  and  capital  as  productive 
agents,  precisely  because  a  difference  in  cost  must  obtain 
with  different  combinations  of  these  agents.  And  thus  it 
appears  that  labor  and  capital,  while  they  may  have  been 
shown  to  be  homogeneous  in  origin,  are  not  necessarily 
under  this  argument  reducible  to  labor  homogeneity  for 
purposes  of  cost  computations. 

It  is  worthy  of  remark  that  Ricardo  does  not  at  this 
point  very  closely  distinguish  how  much  of  his  difficulty  is 
due  to  time,  as  it  expresses  itself  in  interest  charges,  as 
against  time  as  offering  opportunity  for  changes  in  the 
exchange  value  of  labor  or  in  the  exchange  value  of  the 
capital  goods — machines,  buildings,  etc. — or  in  the  ratio 
value  of  labor  and  capital — wages  and  profits. 

James  Mill,  however,  approached  the  problem  without 
misgiving  and  left  it  in  entire  contentment :  This  reduction 
of  capital  and  labor  to  homogeneity  may,  he  says,  be 
attempted  either  (i)  by  the  method  of  reducing  labor  to 
terms  of  capital,  or  (2)  by  reducing  capital  to  terms  of  labor. 
The  first  method  is  declared  impracticable;  true,  the  capi- 
talist pays  the  wages  of  labor  and  reckons  the  wage  pay- 
ment as  a  capital  outlay ;  but  this  is  only  to  say  that  laborers 
and   capitalists    in   co-operation   have   produced   the   com- 


40  VALUE  AND  DISTRIBUTION 

modity  in  question  [as  technologically  they  have,  but  as 
cost-wise  they  have  not] ,  and  that  the  product  should 
belong  to  them  both,  except  for  the  fact  that  one  partner 
has  bought  out  the  other  before  the  returns  are  in;  this, 
however,  it  is  said,  does  not  transform  the  case  into  a 
production  by  capital  alone. 

The  second  method  of  arriving  at  homogeneity  is 
accepted  upon  the  line  of  argument  falteringly  and  dubi- 
ously worked  out  by  Ricardo.  But  how  about  the  diffi- 
culty as  to  time  interest?  Interest,  Mill  replies,  is  merely 
the  slow  payment  for  the  wearing-out  of  capital ;  all  the 
partial  payments  will  equal  the  whole  value  of  the  stored- 
up  labor.  But  even  so,  Mill  asks,  what  shall  be  said  of  the 
increase  which  comes  with  time  to  the  value,  say,  of  wine? 
Where  is  the  labor  in  this?  There  is  no  more  capital  by 
which  to  explain  the  increase.  "It  is  no  solution  to  say  that 
profit  must  be  paid,  because  this  only  brings  us  to  the  ques- 
tion, why  must  profit  be  paid?"  This  must  be  because  the 
capital  applied  elsewhere,  e.  g.,  upon  the  land,  would 
during  the  same  time  have  earned  a  profit,  and  so  must 
have  a  profit  here.  The  wine  which  works  is  like  a 
machine  which  works  without  superintendence,  and  pay- 
ment for  the  work  of  the  machine  is  really  payment  for 
the  work  which  made  it.^^ 

And  so,  having  said  nothing  of  why  the  capital  would, 
in  agriculture,  have  had  any  better  right  to  command  inter- 
est, he  dallies  sentence-long  with  the  principle  of  oppor- 
tunity cost,  and  finally,  having  reduced  the  working  of 
wine,  and  logically  as  well  the  energy  of  all  the  winds  and 
tides,  and,  indeed,  of  every  labor  of  the  whole  universe 
groaning  and  travailing  in  pain  together,  to  terms  of 
human  labor,  goes  on  his  way  unafraid  and  rejoicing. 
And  so  with  MacCulloch,  though  not  quite  so  humorously  so. 

But  with  Ricardo  the  petrified-labor  interpretation  of 
capital    was   not   completely   satisfactory.      In    his    corre- 

"  James  Mill,  Elements  of  Political  Economy,  chap,  iii,  sec.  2. 


RICARDO  41 

spondence  with  MacCulloch,"  he  regretfully  admits,  but 
none  the  less  stoutly  argues,  that  exceptions  must  be  recog- 
nized to  the  general  doctrine  of  proportionality  between 
exchange  value  and  labor  cost ;  but 

all  the  exceptions  to  the  general  rule  come  under  the  one  of  time — 
I  sometimes  think  that  if  I  were  to  write  the  chapter  on  value  again 
which  is  in  my  book,  I  should  acknowledge  that  the  relative  value 
of  commodities  was  regulated  by  two  causes  instead  of  one, 
namely  by  the  relative  quantity  of  labor  necessary  to  produce  the 
commodities   in  question,   and   by   the   rate  of   profit    for   the  time 

that  the  capital  remained  dormant I  am  not  satisfied,  as  I 

have  often  told  you,  with  the  account  I  have  given  of  value, 
because  I  do  not  know  exactly  where  to  fix  my  standard." 

[He  is]  sure  that  the  general  idea  is  right,  [but]  I  cannot  get 
over  the  difficulty  of  the  wine  which  is  kept  in  the  cellar  for 
three  or  four  years,  or  that  of  the  ash  tree  which  perhaps  originally 
had  not  2s.  expended  upon  it  in  the  way  of  labor,  and  yet  comes  to 

be  worth  £100 There  is  no  difficulty  in  measuring  all  this  in 

a  standard  such  as  ours,  but  the  difficulty  is  in  showing  why  we 
fix  on  that  measure,  and  in  proving  it  to  be,  what  a  measure  of 
value  must  be,  itself  invariable.'' 

And  on  August  2,  1823,  Ricardo  wrote  to  IMalthus: 
As  far  as  I  have  yet  been  able  to  reflect  upon  MacCulloch's  and 
Mill's  suggestion,  I  am  not  satisfied  with  it.  They  make  the  best 
defense  for  my  measure,  but  do  not  really  get  rid  of  all  the  objec- 
tions. I  believe,  however,  that  though  not  without  fault,  it  is 
the  best  (ibid.,  p.  160)  . 

That  is  to  say,  Ricardo  believed  that  the  variations  due 
to  capital  influences  are,  in  short-time  adjustments,  rela- 
tively unimportant,  labor  thereby  remaining  "for  many 
commodities  a  fairly  good  standard,  and  with  many  more 
an  excellent  standard." 

And  now,  very  briefly,  attention  must  be  called,  not  to 
the  confusion  of  cost  concepts  involved  in  including  inter- 
est in  cost  while  excluding  rent,  for  this  has  already  occu- 
pied us  overlong,  and  will  later  call  for  still  more  of  time 

"Publications  of  the  American  Economic  Association  (J.  H.  Hol- 
lander), Vol.  X,  Nos.   5,  6,  pp.   70,  71,  177,  178. 
"  Ibid.,  p.  96. 
"Ibid.,  p.   153. 


42  VALUE  AND  DISTRIBUTION 

and  attention,  but  to  the  confusion  of  capital  concepts 
necessarily  associated  with  this  cost  discussion.  How  much 
of  truth  is  there,  for  example,  in  James  Mill's  notion  that 
labor  cost  cannot  be  translated  into  capital  terms,  since, 
despite  the  fact  that  the  employer  must  reckon  his  wage 
payments  as  capital  outlays,  it  remains  true  that  both  capi- 
tal and  labor  have  co-operated  to  produce  the  value  in 
question,  capital  having  simply  bought  out  the  laborer 
before  the  goods  are  marketed?  And  if  it  is  true  that  the 
production  was  not  by  capital  alone,  but  by  capital  and 
labor  in  co-operation,  is  this  equivalent  to  asserting  that  in 
point  of  cost  the  production  process  was  shared?  And  if 
so,  in  what  sense  are  these  co-operating  costs  commensu- 
rable and  homogeneous?  The  employer  has  incurred  outlay 
and  abstinence  costs,  and  possibly,  also,  as  Mill  blunders 
into  recognizing,  opportunity  costs.  As  for  the  wage- 
earner,  he  has  undergone  his  labor  burden,  and  having 
received  his  wages  therefor,  would  appear  to  have  disap- 
peared, for  the  purposes  in  hand,  from  the  cost  reckoning. 
His  wages,  while  costs  to  his  employer,  are  not  cost,  but 
compensation  to  himself.  To  the  employer  they  are  not 
pain  quantities,  but  outlays,  and  as  such  enter  for  him  into 
the  cost  reckoning  solely  under  the  capital  denominator. 
And  his  are  the  only  costs  which  have  to  do  with  the  sale 
aspect  of  the  goods.  The  truth  is  that,  under  competitive 
production,  costs  are  mostly  outlay  costs,  and,  whether  out- 
lay or  other,  are  mostly  or  entirely  reduced  to  the  capital 
denominator.^' 

This  is  the  sense  in  which  Ricardo  and  Mill  were,  for 
the  time  being,  using  the  term  capital,  viz.,  in  the  com- 
mercial, competitive,  acquisitive  sense,  inclusive  of  moneys, 
credits,  supplies,  in  short  all  forms  of  labor-employing  or 
gain-acquiring  funds.  But  this  is  not  at  all  the  sense  in 
which  the  capital  notion  must  sound,  if  anything  is  to  be 
done  with  the  proposition  that  capital  is  stored-up  labor  in 
such  wise  that  interest  may  thereby  be  conceived  as  redu- 
cible to  wages.  For  in  the  competitive-acquisitive  sense, 
capital,  so  far  at  least  as  it  is  of  the  circulating  sort,  is 
something  that  is  constantly  changing  its  form ;  it  is  merely 
basis  for  expenditure,  and  may  be  invested  in  labor  or  in 
materials,  or  as  the  hire  of  capital  goods,  or  as  interest  on 

"  But  outlay  costs  themselves  express  in  turn  one  aspect  of 
opportunity  cost,  or  may  do  so,  viz.,  the  value  of  the  agents  in  hand 
for  their  best  alternative  application ;  but  all  this  must  wait  its  time. 


RICARDO  43 

credit  loans,  or  as  rent  of  land,  or  for  that  matter  in  pretty 
much  anything  else;  that  is  to  say,  it  is  a  form  of  capital 
not  at  all  corresponding  to  capital  taken  in  the  techno- 
logical sense,  as  one  of  the  three  primary  categories  of 
socially  productive  factors,  but  is  a  form  now  labor,  now 
land,  now  materials,  now  machinery,  now  subsistence 
goods,  everything  by  turns  and  nothing  long,  with  only 
one  unifying  and  constant  characteristic,  that  it  is  all  the 
while  a  basis  of  charge  in  the  individual  computation  of 
costs,  thereby  a  competitive  category  of  the  purest  quality. 
And,  indeed,  it  may  as  well  be  noted  in  passing,  that  this 
tripartite  division  of  productive  agents  is  (i)  purely  social, 
(2)  purely  technological.  Competitive  society  has  entirely 
different  categories.  But  the  various  concepts  of  capital 
must  await  their  turn  for  discussion ;  see  chapter  xi. 


CHAPTER  IV 

SENIOR 

Any  other  cause  limiting  supply  is  just  as  efficient  a  cause  of 
value  in  an  article  as  the  necessity  of  labor  in  its  production.  And 
in  fact,  if  all  the  commodities  used  by  man  were  supplied  by  nature 
without  any  intervention  whatever  of  human  labor,  but  were  sup- 
plied in  precisely  the  same  quantities  that  they  now  are,  there  is  no 
reason  to  suppose  either  that  they  would  cease  to  be  valuable,  or 
would  exchange  in  any  other  than  the  present  proportions.^ 

No  writer  of  the  cost  school  is  fairly  to  be  charged 
with  overlooking  the  fact  that  utility  is  a  fundamental 
condition  to  the  existence  of  value;  utility  and  the  market 
demand  resting  upon  it  are  merely  assumed — taken  for 
granted — as  reasonably  going  without  saying.  But  water 
and  wine,  iron  and  gold,  etc.,  are  taken  as  cases  demon- 
strating that  the  fixation  of  value — all  the  while  inside  the 
limits  set  by  utility — must  be  found  on  the  cost  side  of  the 
value  investigation.  True,  there  are  goods  of  a  distinctly 
scarcity  sort,  but  these  Ricardo  and  his  associates  left  out 
of  the  reckoning,  as  exceptional  in  quality  and  relatively 
unimportant  in  volume;  the  investigation  confined  itself 
mostly  or  entirely  to  cases  of  freely  reproducible  goods. 

But  Senior  has  something  to  add  here ;  he  puts  the 
causes  of  value  as  utility  and  scarcity.  Ricardo,  less  accu- 
rately, had  said:  "Possessing  utility,  commodities  acquire 
value  from  two  causes,  labor  and  scarcity."  - 

But  evidently  the  truth  was  with  Senior ;  the  necessity 
for  the  labor  is  in  the  scarcity ;  labor  and  scarcity  point  to 
one  and  the  same  fact.  If  goods  were  supplied  gratui- 
tously but  in  precisely  the  same  quantities  as  now,  the 
exchange  relations  would  be  in  no  wise  afifected ;  the  labor 
requirement  is  purely  an  influence  affecting  the  supply  side 
of  the  value  equation. 

^  Senior,  Political  Economy,   6th   ed.    (London),   p.   24. 
'Op.  cit,,  chap,  i,   sec.   i,  par.  3. 

44 


SENIOR  45 

Ricardo  had  regarded  labor  cost,  in  the  pain  aspect,  as 
the  essence  and  ultimate  significance  of  real  value,  but  had 
regarded  exchange  value  not  as  a  question  of  labor  content 
but  only  of  proportionate  labor  content.  And  he  had 
found  infinite  difficulty  in  getting  interest  costs  into  this 
formulation — to  say  nothing  of  rent.  Senior  purports  to 
find  a  solution  for  this  perplexity.  Homogeneity  between 
capital  cost  and  labor  cost  can,  to  his  thinking,  be  worked 
out  through  his  discovery  of  abstinence  pain  as  the  condi- 
tion ta  which  the  existence  of  capital  is  subjected.  There- 
by labor  and  saving  are  conceived  to  be  reducible  to  a 
common  denominator  of  pain. 

Just  how  much  this  doctrine  would  have  profited 
Ricardo  is  not  altogether  clear.  It  is  to  be  remembered 
that  Ricardo  employed  pain  cost  only  as,  in  terms  of 
ultimate  content,  the  explanation  of  real  value;  and  so  far 
as  real  value  was  concerned,  he  was  not  conscious  of 
needing  more  for  the  further  strengthening  of  his  doc- 
trine. Exchange  values  were  not,  in  his  view,  a  question 
of  pain  cost  in  any  other  sense  than  that,  through  wage- 
cost  outlays,  exchange  values  become  proportional  to 
labor  pains.  But  could  he  not  have  made  exchange  value 
a  proportion  resting  upon  the  combined  pain  of  labor  and 
of  abstinence? 

Recalling,  however,  that  Ricardo  worked  out  his  doc- 
trine only  through  the  medium  of  outlay  cost,  as  a  question 
of  employers'  wage  expenditures,  and  was  able  to  formu- 
late his  proportion  only  upon  the  assumption  of  such 
homogeneity  in  labor  as  would  require  employers  to  pay 
wages  for  it  in  precise  proportion  to  its  quality  of  burden, 
it  becomes  evident  that  capital-saving,  pain  of  abstinence, 
can  be  fitted  into  the  proportion  only  upon  the  twofold 
assumption,  (i)  that  saving  is  homogeneous  in  pain  qual- 
ity so  that  interest  payments  can  be  safely  regarded  as  pro- 
portionate to  savings  pains,  and  (2)  that  savings  pain  and 
labor  pain  are  in  such  wise  homogeneous  that  labor  pain 
and  savings  pain  command  equal  remuneration  per  unit  of 
pain.  But  whether  or  not,  in  close  analysis,  all  this  would 
have  turned  out  to  be  thoroughly  practicable,  it  is  certain 
that  Senior  himself  did  not  attempt  the  necessary  analysis; 
nor  is  it  clear  that  he  adopted  Ricardo's  distinction  between 
real  value  and  exchange  value. 


46  VALUE  AND  DISTRIBUTION 

Senior  makes  labor  and  natural  agents  the  primary 
factors  of  production;  abstinence,  while  not  primary,  is 
none  the  less  important : 

The  power  of  labor  and  of  the  other  instruments  which 
produce  may  be  indefinitely  increased  by  using  their  products  as  the 

means    of    further    production By    the    word    abstinence    we 

seek  to  express  that  agent,  distinct  from  labor  and  the  agency  of 
nature,  the  concurrence  of  which  is  necessary  to  the  existence  of 
capital,  and  which  stands  in  the  same  relation  to  profit  [interest] 
as  labor  does  to  wages.^ 

And  plainly  enough,  from  the  point  of  view  of  laborer 
and  saver — in  purpose  and  possibly  in  moral  deserving — 
interest  is  the  reward  of  abstinence  as  wages  are  the  reward 
of  labor.  But  equally  plainly,  from  the  point  of  view  of 
borrowers  and  employers,  this  identity  of  relation  does  not 
hold;  wages  are  paid  for  the  services  of  labor  as  a  pro- 
ductive agent ;  interest  is  not  paid  for  the  services  of  absti- 
nence as  productive  agent,  but  for  the  services  of  capital. 

To  the  objection  to  calling  abstinence  an  active  agent 
of  any  sort,  Senior  replies :  "To  abstain  from  the  enjoy- 
ment which  is  within  our  power,  or  to  seek  distant  rather 
than  iinmediate  results,  are  [sic]  among  the  most  painful 
exertions  of  the  human  will."  * 

However,  even  if  it  be  true  that  abstinence  is  painful, 
this  is  world-wide  from  showing  that  it  is  productive,  and 
still  farther  from  showing  that  remuneration  according  to 
productiveness  and  remuneration  according  to  pain  fulness 
must  lead  to  one  and  the  same  result.  But  in  point  of  fact 
it  is  not  clear  that  abstinence  is  an  independent  fact  of 
pain.  When  one  has  produced  wealth  the  question  before 
him  is  when  and  how  to  spend  it;  the  wealth  is  a  good 
thing  to  have ;  whatever  grief  there  may  have  been  in  its 
getting  is  all  past,  and  the  time  for  the  other  side  of  the 
account  has  arrived.  How  to  take  one's  enjoyment,  the 
manner  as  well  as  the  time  of  it,  may  be  a  puzzlesome 
matter  and  may  give  occasion  to  a  deal  of  doddering.  And 
it  is  true  that  the  abstinence  may  involve  the  denial  of 
satisfaction  to  a  present  and  pressing  want;  it  is  equally 
true,   however,   that   the   choice   may   lie   between   positive 

^  Senior,  op,  cit.,  p.  59. 

*  Senior,  op.  cit.,  p.  59.  Precisely  in  the  same  sense  and  for  the 
same  argumentative  end,  Courcelle-Seneuil  uses  the  term  travail  de 
I'epargne. 


SENIOR  47 

gratifications;  it  would  be  a  waste  of  sympathy  to  grieve 
with  one  who  has  to  choose  between  two  pleasures,  and  to 
call  either  pleasure  a  pain  because  it  is  conditioned  on 
going  without  the  other  pleasure.  The  term  sacrifice 
might  be  serviceable  here  for  expressing  the  truth  of  the 
case,  though  the  cost  argument,  as  one  of  pain,  would 
not  thereby  be  greatly  strengthened.  But  all  of  this  has, 
of  course,  nothing  to  say  as  to  the  proposition  that,  with- 
out some  compensation,  the  considerations  making  for 
present  as  against  deferred  enjoyment  might  be  the  stronger, 
and  the  saving  fail  to  take  place:  nor  is  anything  to  be 
inferred  as  to  this  or  any  other  justification,  mor- 
ally speaking,  for  the  receipt  of  interest.  But,  in  itself, 
abstinence  is  not  pain,  and  may  not  remotely  imply  pain ; 
it  is  often  only  one  of  the  different  data  in  a  choice  between  / 
pleasures.  Whether  or  not,  were  it  always  a  pain,  it  could 
be  reduced  to  a  common  denominator  with  labor  pain  is, 
therefore,  not  a  pressing  problem. 

Bearing  in  mind  the  sense  in  which  Senior  stands  for 
the  proportionality  of  value  to  cost,  there  need  be  no  sur- 
prise   in    meeting    his    assertion    that    neither    profits    nor   ' 
wages  are  costs,  but  only  abstinence  and  labor.^ 

In  a  sense  and  as  bearing  on  the  concept  of  real  value, 
Ricardo  would  have  assented  to  this ;  and  as  bearing  on 
market  value  also,  Ricardo  would  have  been  keen  to  insist 
that  wages  and  interest  are  not  ultimate  determinants  of 
value  but  only  that  values  are  proportioned  to  them ;  but  it 
would  have  sounded  strange  to  Ricardo  to  hear  it  denied 
with  reference  to  market  value  that  wages  and  interest  are 
costs.  This  doctrine  of  Senior  is,  in  fact,  a  definite  aban- ! 
donment  of  the  notion  of  outlay  cost;®  his  doctrine  of  pro- 
portionality does  not  perhaps  thereby  of  necessity  fail,  but 
it  certainly  awaits  the  making  of  its  case.  If  labor  and 
abstinence  cannot  be  made  homogeneous  and  commensu- 
rable as  items  of  pain  cost — and  particularly,  if  abstinence 
(or,  for  that  matter,  labor)  is  not  necessarily  a  pain  cost  at 

■*  Senior,  op.  cit.^  p.  loo. 

•  "Want  of  the  term  sacrifice,  or  of  some  equivalent  expression,  has 

led  Mr.  Malthus  into  inaccuracy  of  language When  he  termed 

profit  a  part  of  cost  of  production,  he  appears  to  have  meant,  not 
profit,  but  that  conduct  which  is  repaid  by  profit ;  an  inaccuracy  pre- 
cisely similar  to  that  committed  by  those  who  term  wages  a  part  of  the 
cost  of  production  ;  meaning  not  wages,  which  are  the  result,  but  the 
labor  for  which  wages  are  the  remuneration." — Senior,  op.  cit.,  p.   loo. 


48  VALUE  AND  DISTRIBUTION 

all,  and  if  the  common  denominator  of  market  value  under 
the  entrepreneur  outlay-cost  analysis  is  abandoned,  it  only 
remains  to  wonder  what  the  solution  will  be. 
'  But  after  all,  Senior  has  a  proportion  doctrine;  he  says: 
When  the  only  valuable  agents  employed  are  those  which  are 
universally  accessible  and  are  therefore  practically  unlimited  in 
supply  [that  is,  when  there  is  neither  capital  nor  land,  or  where 
there  are  unlimited  capital  and  land,  and  so  no  dififerentials  of 
advantage],  the  utility  of  the  produce,  or,  in  other  words  its 
power  [in  exchange?],  must  be  in  proportion  to  the  sacrifice  made 
to  produce  it,  ...  .  since  no  man  would  willingly  employ  a  given 
amount  of  labor  or  abstinence  in  producing  one  commodity,  if  he 
could  obtain  more  advantage  by  directing  them  .[it]  to  the  produc- 
tion of  another.' 

This  is  one  of  Senior's  italicized  theorems ;  it  is  to  be 
objected  that  there  is  no  reason  why  the  utility  of  products 
should  be  proportional  to  the  sacrifices  of  production, 
unless  upon  the  assumption  not  only  of  the  homogeneity 
of  labor  pain,  but  also  of  the  reduction  of  utility  to  a  mar- 
ginal basis.  Otherwise  it  must  merely  be  true  that,  if  a 
producer  could,  with  a  given  sacrifice,  produce  something 
of  greater  utility  than  the  thing  in  hand,  he  would  change 
his  direction  of  production. 

But  in  essentials  Senior's  doctrine  is  really  a  doctrine 
of  opportimity  cost — requiring,  however,  some  modifica- 
tion. Opportunity  cost  may  as  well  lie  in  some  alternative 
between  pleasures  or  benefits,  as  between  pains  or  burdens ; 
at  the  day's-end  margin,  labor  may  be  still  a  pleasant  thing, 
and  yet  be  abandoned,  if  only  the  attractiveness  of  recrea- 
tion be  such  as  to  outweigh  the  pleasures  of  the  labor 
process  taken  in  conjunction  with  the  advantages  of  the 
resulting  product.  Among  those  different  possibilities  of 
activity  in  which  products  outweigh  burden,  that  one  will 
be  selected  in  which  the  ratio  of  product  to  effort  is  most 
favorable,  or,  more  accurately,  in  which  the  surplus  of  sat- 
isfaction is  greatest.^  The  opportunity  cost  involved  in 
the  case  would  be  found  in  the  advantages  of  that  course 

'  Senior,  op.  cit.,  p.  97. 

*  Patten  and  Clark  have,  perhaps,  best  elaborated  this  truth.  And 
it  may  be  remarked  that  this  also  is  not  quite  accurate  ;  we  are  not 
necessarily  committed  to  any  homogeneity-and-quantity  calculus  of 
pleasure.  All  of  the  requirements  of  the  case  would  be  met — and 
better  met — ^by  substituting  the  clause :  in  which  the  surplus  of  satis- 
faction is  the  most  desirable. 


SENIOR  49 

of  activity  between  which  and  the  selected  course  the  prob- 
lem of  choice  was  actually  presented — that  is,  in  the  most 
attractive  course  among  the  competing  and  vanquished 
alternatives. 

But  Senior  makes  it  clear  that  commodities  may  be  of 
sorts  that  cannot  be  reproduced,  or  that  can  be  had  Only  at 
remote  and  uncertain  intervals ;  here  the  values  "are  sub- 
ject to  no  certain  rule,  and  depend  altogether  on  the  wealth 
and  taste  of  the  community." "  That  is  to  say,  the  supply 
term  being  inelastic,  the  value  is  left  to  be  determined  by 
the  utility,  or  by  the  demand,  or,  at  all  events,  by  some- 
thing taken  for  granted  and  unanalyzed  on  the  demand 
side.  But,  for  most  commodities — the  kind  that  we  are 
considering — "the  obstacle  to  the  supply  ....  con- 
sists ....  in  the  difficulty  of  finding  persons  ready  to 
submit  to  the  labor  and  abstinence  necessary  to  their  pro- 
duction. In  other  words,  the  supply  is  limited  by  the  cost 
of  production."  ^° 

Here  it  is  evident  that  Senior  abandons  the  opportunity 
computation  and  goes  back  to  pain  cost.  For  with  him 
abstinence  is  not  intended  to  carry  its  possible  implication 
of  the  foregoing  of  products  alternatively  producible.  He 
is  talking  about  the  grief  and  groan  of  saving  and  the 
burden  and  backache  of  labor;  and  in  this  absorption  he 
neglects  to  ask  himself  the  very  simple  question  why  in 
actual  society  so  many  men  are  indisposed  to  enter  the 
business  of  hat  production.  Is  it  really  true  that  the  dis- 
comforts of  the  occupation  are  an  adequate  explanation  of 
the  facts? 

Senior  admits  that,  to  be  accurate  for  short  periods, 
his  cost  doctrine  must  presuppose  perfect  mobility  in  capi- 
tal and  labor ;  but  it  is  to  be  noted  that  even  this  inadequacy 
would  disappear  if  his  doctrine  of  cost  really  rested  on  the 
sacrifice  of  alternative  opportunities.  But  admitting  these 
temporary  variations,  he  reflects : 

Political  Economy  does  not  deal  with  particular  cases,  but 
with  general  tendencies ;  and  when  we  assign  to  cost  of  production 

•  Op.  cit.,  p.  97. 
^Ibid.,  p.  97. 


50  VALUE  AND  DISTRIBUTION 

the  power  of  regulating  prices  in  cases  of  equal  competition,  we 
mean  to  describe  it  not  as  a  point  to  which  price  is  attached,  but  as 
a  center  of  oscillation  which  it  is  always  endeavoring  to  approach." 

And  then  he  goes  on  to  show  that  production  in  which 
no  appropriated  natural  agent  has  been  concerned  is  the 
only  case  of  perfectly  equal  competition ;  all  others  are 
cases  of  monopoly  more  or  less  marked. 

Just  why,  from  the  point  of  view  of  outlay  cost — the 
only  tenable  point  of  view  for  the  proportion  doctrine — it 
should  be  alleged  that  free  competition  fails,  so  long  as,  on 
terms  of  paying  the  market  charge,  all  competitors  have 
equal  opportunity  of  enjoying  the  advantages  attending 
the  control  of  appropriated  natural  agents,  is  not  clear, 
though  it  is  clear  enough  from  the  point  of  view  of  pain 
cost.  But  Senior  makes  full  and  frank  admission  that,  in 
actually  existing  conditions,  his  doctrine  of  pain  cost  leads 
nowhere,  so  far  as  explaining  market  values  is  concerned ; 
he  has  arrived  at  the  very  impasse  that  Ricardo  faced : 

It  is  difficult  to  point  out  an  article,  however  simple,  that  can 
be  exposed  to  sale  without  the  concurrence,  direct  or  indirect,  of 
many  hundred,  or,  more  frequently,  of  many  thousand,  different 
producers,  almost  every  one  of  whom  will  be  found  to  have  been 
aided  by  some  monopolized  agent.  There  are  few  things  of  which 
the  price  seems  to  consist  more  exclusively  of  wages  and  profits 
than  a  watch  [MacCulloch's  favorite  example]  ;  but  if  we  trace 
it  from  the  mine  to  the  pocket  of  the  purchaser,  we  shall  be 
struck  by  the  payment  of  rent  ....  at  every  stage  of  its  progress. 
Rent  was  paid  for  the  privilege  of  extracting  from  the  mines  the 
metals  of  which  it  is  composed;  for  the  land  which  afforded  the 
materials  of  the  ships  in  which  those  metals  were  transported  to 
an  English  port;  for  the  wharves  at  which  they  were  landed,  and 
the  warehouses  where  they  were  exposed  for  sale;  the  watch- 
maker pays  a  rent  for  the  land  covered  by  his  manufactories,  and 
the  retailer  for  that  on  which  his  shop  is  situated.  The  miner,  the 
shipwright,  the  housebuilder,  and  the  watchmaker,  all  use  imple- 
ments formed  of  materials  produced  by  the  same  processes  as  the 
materials  of  the  watch,  and  subject  also  in  their  different  stages  to 

similar  payments  of  rent When  we  speak,  therefore,  of  a 

class  of  commodities  as  produced  under  circumstances  of  equal 
competition,  or  as  the  result  of  labor  and  abstinence,  unassisted 
by  any  other  appropriated  agent,  and  consider  their  prices  as  equal 

"  Op.  cit.,  p,    102. 


SENIOR  SI 

to  the  sum  of  wages  and  profits  that  must  be  paid  for  their  pro- 
duction, we  do  not  mean  to  state  that  any  such  commodities  exist 
but  that,  if  they  did  exist,  such  would  be  the  laws  by  which  their 
prices  would  be   regulated.'^ 

All  of  which  may  fairly  be  described  as  a  dissertation,  by  a 
great  labor-value  authority,  upon  how  labor  does  not  regu- 
late value.  But  note  that  by  some  method  of  swift  trans- 
formation the  point  of  view  has  now  become  that  of 
competitive-outlay  cost,  and  that  rent  as  well  as  interest 
outlays  are  now  included  in  the  charges  that  go  to  make  up 
market  price. 

Nevertheless,  Senior  in  his  discussion  of  rent  implies 
his  acceptance  of  the  Ricardian  doctrine  that  rent  is  not  a 
part  of  value-regulating  cost.  Still  it  must  be  said  that  he 
does  not  so  declare  in  terms ;  he  does,  however,  point  out 
that  Ricardo,  in  his  controversy  with  Say,  committed  the 
fault  of  inaccuracy ;  Ricardo  should  have  made  his  stand 
for  price-determining  cost  at  the  intensive  margin.  And 
with  this  amendment  Senior  appears  to  acquiesce  in  the 
Ricardian  doctrine,  so  far  as  it  asserts  that  price  tends  to 
coincide  with  the  cost  of  that  part  of  the  product  pro- 
duced at  the  greatest  expense :  nor  does  he  seem  to  recog- 
nize that,  from  the  point  of  view,  not  of  social,  but  of  outlay 
cost,  there  is  no  reason  why  costs  on  better  land  should 
be  either  greater  or  smaller  than  costs  on  poorer  or  on 
marginal  land. 

But  there  is  possibility  or  misinterpreting  Senior  at  this 
point — for  it  is  hard  to  see  how  he  can  regard  interest  as 
a  value-determining  cost  and  still  exclude  rent.  For  he 
makes  it  clear  that  the  distinction  between  rent  and  interest 
ceases  to  have  significance,  as  soon  as  the  capital  has 
become  the  property  of  someone  to  whose  exertions  and 
abstinences  it  did  not  owe  its  origin.  And  he  rightly 
remarks  that  there  is,  of  course,  abstinence  in  not  selling 
property,  of  no  matter  what  sort  or  origin,  and  in  not 
spending  the  proceeds  in  current  enjoyment.  Evidently, 
however,  if  this  were  fully  worked  out,  all  rent  would 
become  interest.     And  Senior  finds  also  great  difficulty  in 

"Op.  cit.,  pp.    1 12-14,  passim. 


52  VALUE  AND  DISTRIBUTION 

drawing  the  line  between  wages  and  rent,  and  inclines  to 
regard  as  rent  all  cases  of  extraordinary  compensation  for 
unusual  ability.^^ 

"  "We  may  be  asked,  then,  whether  the  improvements  which  form 
the  greater  part  of  the  value  of  the  soil  of  every  well-cultivated  district 
are  all,  and  forever,  to  be  termed  capital ;  whether  the  payments 
received  from  his  tenants  by  the  present  owner  of  a  Lincolnshire 
estate,  reclaimed  by  the  Romans  from  the  sea,  are  to  be  termed  not 
rent,  but  profit  on  the  capital  which  was  expended  fifteen  hundred 
years  ago.  The  answer  is,  that  for  all  useful  purposes  the  distinction 
of  profit  from  rent  ceases  as  soon  as  the  capital,  from  which  a  given 
revenue  arises,  has  become,  whether  by  gift  or  by  inheritance,  the  property 
of  a  person  to  whose  abstinence  and  exertions  it  did  not  owe  its  creation. 
The  revenue  arising  from  a  dock,  or  a  wharf,  or  a  canal,  is  profit  in 
the  hands  of  the  original  constructor.  It  is  the  reward  of  his  absti- 
nence in  having  employed  capital  for  the  purposes  of  production  instead 
of  those  of  enjoyment.  But  in  the  hands  of  his  heir  it  has  all  the  attri- 
butes of  rent.  It  is  to  him  the  gift  of  fortune,  not  the  result  of  a 
sacrifice.  It  may  be  said,  indeed,  that  such  a  revenue  is  the  reward 
for  the  owner's  abstinence  in  not  selling  the  dock  or  the  canal  and 
spending  its  price  in  enjoyment.  But  the  same  remark  applies  to  every 
species  of  transferable  property.  Every  estate  may  be  sold,  and  the 
purchase  money  wasted.  If  the  last  basis  of  classification  were 
adopted,  the  greater  part  of  what  every  Political  Economist  has  termed 
rent  must  be  called  profit." — Op.  cit.,  p.   129. 

Professor  Whittaker  does  not  appear  to  experience  the  difficulty 
that  I  have  met  in  interpreting  Senior's  position  as  to  the  relations  of 
rent  to  cost.  To  me  it  seems  impossible,  upon  any  classical  level  of 
discussion,  to  include  rent  payments  within  pain  cost ;  it  is  equally  diifi- 
cult  to  exclude  rent  payments  from  outlay  costs,  unless  the  distinction 
is  set  up  between  value-determining  and  value-determined  costs. 
Whittaker  writes  (Whittaker,  op.  cit.,  pp.  102-4)  : 

"According  to  Senior,  land  rent  enters  into  price.  So  far  both 
'profits'  of  stock  and  rent  of  land  exist  to  destroy  the  proportionality 
of  values  to  labor  cost.  This  is  the  result  to  which  Malthus'  criti- 
cism of  Ricardo  led.  But  Senior's  criticism  goes  beyond  Malthus'. 
Wages,  as  an  element  in  entrepreneur's  cost,  are  not  even  in  proportion 
to  the  labor  remunerated.  That  is  to  say,  that  is  what  Senior  says, 
if  we  keep  his  thought  while  reforming  his  language.  He  states  that 
the  actual  income,  which  we  always  call  wages,  is  really  composed  in 
many  cases  of  wages,  profits,  and  rent.  He  says  this  because  he  wishes 
to  define  wages  as  that  remuneration  which  is  in  proportion  to  sacri- 
fice  Senior's  rent  to  skill  is  really  an  excess  of  wages  over  the 

amount  required  to  be  in  proportion  to  disutility"  (pp.  102,  103). 

"Piecing  together  for  ourselves  what  Senior  says,  it  is  his  position 
that  the  value  of  commodities  must  include  (if  the  commodities  are  to 
be  produced)  rent,  profits,  and  wages  ;  rent  and  profits,  being  different 
percentages  in  the  whole  entrepreneur's  cost  of  different  goods,  make 
values  out  of  proportion  to  labor  cost ;  there  is  no  necessity  of  consid- 
ering profits  as  an  element  in  entrepreneur's  cost  approximately  in  pro- 
portion to  wages ;  and  lastly,  wages  are  not  in  proportion  to  labor, 
which  is  disutility"   (p.   104). 


CHAPTER  V 
JOHN  STUART  MILL 

With  John  Stuart  Mill  the  transition  is  approxi- 
mately complete  to  the  point  of  view  of  entrepreneur 
cost. 

We  need  delay  long  neither  upon  his  doctrine  of  the 
determination  of  wages — the  wage-fund  theory  for  short 
periods,  and  the  population-subsistence  doctrine  for  long- 
time tendencies — nor  upon  his  determination  of  interest 
payments  according  to  the  cost-abstinence  analysis  as 
related  to  the  supply  of  capital ;  no  matter  how  these 
outlays  get  determined,  it  is  sufficient,  for  present  pur- 
poses, to  note  that,  accepting  them  as  the  market  gives 
them,  Mill  treats  them  as  items  of  outlay  cost,  and  finds 
market  values  to  be  fixed  according  to  the  law  of  costs  as 
formulated  in  the  entrepreneur  sense — but  all  the  while 
with  two  modifications,  one  of  addition  and  one  of  sub- 
traction :  for,  following  Ricardo's  doctrine,  rent  is  made 
no  part  of  price,  and  wages  of  superintendence,  as  an 
element  in  minimum  profit,  are  included  in  price.  Mini- 
mum profit  is  defined  as  "that  which  is  barely  adequate, 
at  the  given  place  and  time,  to  afiford  an  equivalent  for 
the  abstinence,  risk,  and  exertion  implied  in  the  employ- 
ment of  capital."  ^  After  covering  all  outlays,  and  after 
remunerating  the  capitalist  owner  for  forbearing  to  con- 
sume, there  must  be  something  left  to  recompense  the 
labor  and  skill  of  the  person  who  devotes  his  time  to  the 
business ;  but  how  much  ?  The  amount  is  variable 
depending  on  the  amount  necessary  to  compensate  the 
abstinence,  and  still  more  variable  to  compensate  the 
risk.  "That  portion,  too,  of  the  gross  profit  which  forms 
the  remuneration  for  the  labor  and  skill  of  the  dealer  or 

^John  Stuart  Mill,  Principles  of  Political  Economy,  Book  II,  chap. 
XV,  sec.  2. 

S3 


54  VALUE  AND  DISTRIBUTION 

producer  is  very  different  in  different  employments."  ^ 
Mill  does  not  say  why,  but  cites  apothecaries  as  an  exam- 
ple of  a  trade  where  "a  considerable  amount  of  labor  and 
skill  is  required  to  conduct  a  business  necessarily  of  limited 

extent A    higher    than    common    rate   of    profit    is 

necessary  to  yield  only  the  common  rate  of  remunera- 
tion  After  due  allowance  is  made  for  the  various 

causes  of  inequality"  giving  greater  or  less  wages  of  super- 
intendence or  of  risk,  "the  rate  of  profit  [interest]  on  capi- 
tal in  all  employments  tends  to  an  equality."  ^ 

There  is  certainly  no  hint  of  opportunity  cost  here ;  so 
far  as  any  determinant  of  minimum  profit  is  indicated,  it  is 
one  of  pain  or  burden.  But  at  any  rate,  as  it  is  elsewhere 
said,  "the  cause  of  profit  is  that  labor  produces  more  than 
is  required  for  its  support."  * 

Still  it  is  not  clear  whether  this  phrase,  "required  for  its 
support,"  points  to  a  minimum-of-subsistence  principle,  or 
to  a  standard-of-living  principle,  or  whether  the  proposi- 
tion is  a  mere  mathematical  truism.  "The  reason  why 
capital  yields  a  profit  is  because  food,  clothing,  materials, 
and  tools  last  longer  than  the  time  which  men  take  to  pro- 
duce them :"  so  that  there  is  a  surplus  to  the  capitalist. 
This  might  appear  to  look  toward  some  subsistence  doc- 
trine, if  only  Mill  had  not  elsewhere  repudiated  that  doc- 
trine,— at  all  events  for  short-time  adjustments, — setting  up, 
instead,  the  capital  limitation  and  wage-fund  determination: 
but  the  better  interpretation  seems  to  be  merely  that,  prod- 
ucts having  exceeded  outlay,  there  is  a  remainder  left  over 
for  the  employer.  "If  the  laborers  of  the  country  collect- 
ively produce  twenty  per  cent,  more  than  their  wages, 
profits  will  be  twenty  per  cent.,  whatever  prices  may  or  may 
not  be."  ^    This  is  Ricardo's  ratio  idea. 

Outlays  for  materials  and  implements  are  resolved  into 
wage  payments :  "he  thus  repays  to  a  previous  producer  the 
wages  which  that  previous  producer  has  paid."  ^  True, 
there  is  a  profit  with  it,  but  had  the  present  em- 
ployer produced  these   supplies   for   himself,   there   would 

'  Mill,  op.  cit.,  sec.  3.  "  Ibid.,  sec.  5. 

'Ibid.,  sees.  3,  4.  ^ Ibid.,  sec.  6. 

*  Ibid.,  sec.  5. 


JOHN  STUART  MILL  55 

also  have  been,  to  be  reckoned  in  the  cost,  a  profit  for  him- 
self (but  how  much  is  again  not  said)  ;  and  so  in  the  sum- 
ming up,  "all  the  advances  have  consisted  of  nothing  but 
wages,"  excepting  what  have  already  gone  for  profit. 
Note  that  profit  in  Mill's  use  here  includes  not  only  interest, 
but  something  more  than  interest,  something  for  superin- 
tendence and  risk. 

The  gains  of  the  capitalist  employer  depend,  then,  on 

the  magnitude  of  the  produce;  ....  secondly,  the  proportion  of 
that  produce  obtained  by  the  laborers  themselves;  the  ratio — the 
rate  of  profit,  the  percentage  on  the  capital — depends  on  the 
second  of  the  two  elements,  the  laborers'  proportional  share,  and 
not  on  the  amount  to  be  shared We  thus  arrive  at  the  con- 
clusion of  Ricardo  and  others,  that  the  rate  of  profit  depends  on 

wages However,  ....  instead    of    saying    that    profits 

depend  on  wages,  let  us  say — what  Ricardo  really  meant — that 
they  depend  on  the  cost  of  labor.^ 

It  is  well  to  note  in  passing  that  this  was  not  what 
Ricardo  meant :  Mill  is  hesitatingly  and  gradually  deserting 
the  doctrine  of  relative  shares  in  the  product — the  ratio- 
value  concept — and  is  going  over  to  the  notion  of  profit, 
not  as  fraction  but  as  absolute  residuum, — surplus  above  out- 
lay :  "What  labor  brings  in  to  the  laborer  and  what  it  costs 
to  the  capitalist,  are  ideas  quite  distinct,  and  which  it  is  of 
the  utmost  importance  to  keep  so."  ^  True,  there  are  all 
levels  of  wages,  but  if  at  the  same  time  the  efficiency  is  of  a 
sort  to  correspond,  the  cost  of  labor  to  the  capitalist  may  be 
no  greater. 

And  note  again  that  there  is  still  nothing  here  about 
causes ;  the  reasoning  is  entirely  mathematical ;  the  prob- 
lem is  not  treated  as  distributional  in  the  sense  of  looking 
for  the  ultimate  forces  of  determination,  and  one  is  left 
to  wonder  how,  efficiency  remaining  the  same,  etc.,  the 
wages  should  so  rise  or  fall,  or  why  the  supplies  which  the 
laborer  buys  with  his  wages  become  more  or  less  costly. 
If  one  resorts  to  the  wage-fund  doctrine  for  help,  he  is 
confronted  by  the  suspicion  that  this  doctrine  also  is  merely 
mathematical,  and  as  such,  is  a  truism.  Thus  far,  then,  the 
entire  discussion  has  amounted  to  a  descriptive  treatment 
of  wages,  interest,  and  profits,  as  elements  entering  into 
cost  of  production ;  and  so  far  as  the  exposition  has  yet 

^  Ibid.,  sec.  7.  '  Ibid.,  sec.  7. 


$6  VALUE  AND  DISTRIBUTION 

proceeded,  these  remunerations  stand  as  ultimate  opaque 
unyielding  facts,  unexplained  and  irreducible  data,  furnish- 
ing the  basis  for  entrepreneur  cost. 

Turning  now  to  Mill's  formal  discussion  of  value  in 
the  chapter  under  that  caption,  and  especially  to  his  dis- 
cussion of  "Cost  of  Production  in  Its  Relation  to  Value,"" 
we  find  it  said  that  value,  no  matter  under  what  law  of 
return,  is  always  the  result  of  demand  and  supply.  The 
minimum  price  must  be  sufficient  to  pay  the  cost  and  the 
ordinary  expectation  of  profit,  else  capitalists  will  not  go 
on  producing  the  commodity. 

Note  that  profit  is  here  treated  as  something  over  and 
above  cost,  cost  being  regarded  as  substantially  the  equiva- 
lent of  expenditure,  "They  will  not  even  go  on  producing 
at  a  profit  less  than  they  can  live  upon" — seemingly  a  doc- 
trine of  subsistence  minimum  for  employers ;  but  what  will 
they  do  instead?  Doubtless,  as  it  is  said,  they  may  submit 
to  temporary  loss  in  hope  of  better  times,  but,  broadly,  "the 
cost  of  production  together  with  the  ordinary  profit  may  be 
called  the  necessary  price." 

And  here,  again,  we  remark  there  is  as  yet  nothing  to 
indicate  how  much  must  be  this  necessary  profit,  or  what 
are  the  ultimate  forces  in  its  determination.  But  Mill 
shows  that  by  the  influence  of  prices  upon  the  outflow  and 
inflow  of  capital,  profits  are  always  tending  toward  equal- 
ity; and  precisely  this  trend  toward  equality  is  presented 
as  the  guarantee  that  things  will  exchange  against  one 
another  in  the  ratio  of  their  costs.  Perhaps,  after  all,  this 
may,  for  present  purposes,  be  accepted  as  a  sufficient 
explanation  for  the  determination  of  profits,  so  far  as 
profits  are  held  to  mean  interest  only;  but  as  so  under- 
stood, the  doctrine,  fully  worked  out,  will  resolve  itself  into 
a  case  of  opportunity  cost. 

Mill's  "Ultimate  Analysis"  ^^  is  most  difficult  of  ade- 
quate summary  or  even  of  fair  paraphrase. 

Tracing  capital  to  its  ultimate  origins.  Mill  finds  that 
labor  is  "so  much  the  principal  cost  of  production  as  to  be 

'  Mill,  op.  cit..  Book  III,  chaps,  i-iv. 
'°  Mill,  op.  cit.,  Book  III,  chap.  iv. 


JOHN  STUART  MILL  57 

nearly  the  sole  cost."  And  so  it  is  approximately  accurate 
to  resolve  interest  into  wages;  so  cost,  as  regarded  from 
the  employer's  point  of  view,  is  a  question  of  wage  out- 
lays,— wages,  and  not  labor,  being  from  this  standpoint  the 
basis  of  cost.  But  wages  are  cost  only  as  modified  by 
considerations  of  efficiency,  that  is,  only  with  reference  to 
the  quality  and  quantity  of  product.  In  substance,  the  doc- 
trine is  that  a  given  sum  of  products  costs  the  wages 
directly  or  indirectly  paid  out  to  produce  it.  But,  after  all, 
values  of  commodities  are  exchange  relations  of  commodi- 
ties with  one  another ;  values  are,  then,  purely  relative ;  and 
therefore  costs  of  production  as  bearing  on  value  are  not 
absolute  but  relative  quantities.  So  value  relations  are 
independent  of  influences  of  cost,  whether  of  rise  or  of  fall, 
if  only  the  commodities  under  comparison  are  proportion- 
ally afifected.  "Otherwise,  there  could  be  no  such  thing 
as  a  real  rise  of  wages;  for  if  wages  could  not  rise  without 
a  proportionate  rise  in  the  prices  of  everything,  wages  could 
not  rise  at  all."  But  if  wages  are  higher  in  one  industry 
than  in  another,  values  will  be  affected  through  costs. 

Note  that  these  differences  in  wages  are  not  explained 
as  due  to  differences  in  the  values  of  the  products;  it  is  just 
the  other  way  about.  "Things  ....  which  are  made  by 
skilled  labor  exchange  for  the  products  of  a  much  greater 
quantity  of  unskilled  labor,  for  no  reason  but  because  the 
latter  is  more  highly  paid."  Thus  there  is  no  proportion 
of  value  to  labor,  but  only  to  entrepreneur  costs ;  and  these 
costs  are  presented  as  causal  and  ultimate.  "So  wages  do 
enter  into  value;  the  relative  wages  of  the  labor  necessary 
for  producing  different  commodities  affect  the  value  as 
much  as  the  relative  quantities  of  labor The  abso- 
lute wages  paid  have  no  effect  upon  value,  but  neither  has 
the  absolute  quantity  of  labor."  But,  in  substance  and 
effect,  values  are  nevertheless  proportional  to  quantity  of 
labor :  "In  considering,  however,  the  causes  of  variations 
in  value,  quantity  of  labor  is  the  thing  of  chief  impor- 
tance," for  that  varies  now  with  one  commodity  and  now 


58  VALUE  AND  DISTRIBUTION 

with  another,  but  variations  in  wages  are  usually  general, 
and  thus,  by  the  very  fact  of  being  general,  have  no  signifi- 
cance for  value. 

Note,  however,  that  this  proposition  really  goes  no 
farther  than  to  say  that  variations  in  value  come,  not 
through  a  rise  in  general  wages,  but  through  changing 
methods  of  applying  labor  to  production.  But  changes  in 
machinery  and  appliances  are  at  least  as  frequent  and  as 
radical  as  changes  purely  of  the  labor  sort;  it  therefore  fol- 
lows that  variations  in  values  due  to  causes  working  on  the 
side  of  profits  (interest)  are  at  least  equally  important  with 
those  working  on  the  side  of  wages. 

But  all  of  this  must  allow  for  modification  through  the 
bearing  of  profits  (interest-j-risk-charge-j- wages  of  super- 
intendence) on  value,  in  so  far  as  some  industries  are  more 
capitalistic  than  others  in  their  methods  of  production. 
But  here  also  it  is  evident  that  not  absolute  profits  but  only 
relative  profits  have  significance  for  exchange  relations. 
And,  as  Mill  rightly  insists,  profits  are  found  to  differ  in 
this  relative  way,  butchers,  for  example,  gaining  higher 
profits  than  bakers.  And  time,  with  its  correlative  of  inter- 
est, also  becomes  of  great  importance,  as  in  the  aging  of 
wine. 

[If  to]  attain  the  desired  quality,  the  wine  requires  to  be  kept 
five  years,  the  producer  or  dealer  will  not  keep  it,  unless  at  the 
end  of  five  years  he  can  sell  it  for  as  much  more  ....  as  amounts 
to  five  years'  profit,  accumulated  at  compound  interest.  Here,  then, 
is  a  case  in  which  the  natural  values  ....  do  not  conform  to  cost 
of  production  alone,  but  to  cost  of  production  plus  something  else. 
Unless,  indeed,  for  the  sake  of  generality  in  the  expression,  we 
include  the  profit  which  the  wine  merchant  foregoes  during  the  five 
years,  in  the  cost  of  production  of  the  wine:  looking  upon  it 
as  a  kind  of  additional  outlay,  over  and  above  his  other  advances, 
for  which  outlay  he  must  be  indemnified  at  last. 

Evidently  Mill  is  not  entirely  clear  as  to  the  basis  on 
which  this  time  charge  is  to  be  counted  a  cost,  if,  indeed,  it 
is  to  be  so  counted  at  all ;  in  a  sort,  values  seem  to  conform 
"to  their  costs  of  production  plus  something  else.  This, 
however,  disturbs  the  general  consistency  of  the  theoreti- 


JOHN  STUART  MILL  59 

cal  formulation ;"  there  may,  then,  after  all,  be  nothing  for 
it  but  to  recognize  opportunity  cost  in  this  exceptional  case. 

Mill  does  not,  however,  in  terms  commit  himself  abso- 
lutely to  this  view ;  but  "all  commodities  made  by  waiting 
are  assimilated,  at  least  approximately,  to  the  wine  in  the 
preceding  example."  And  he  closes  with  regarding  these 
time-charge  items  as,  in  the  relative  bearing,  very  impor- 
tant influences  upon  values,  although  nothing  further  than 
this  suggestion  of  opportunity  cost  is  accomplished  in  the 
direction  of  telling  why.  At  any  rate,  it  is  clear  that  "in 
comparison  with  things  made  wholly  by  immediate  labor, 
profits  enter  more  largely  into  the  cost  of  production"  of 
all  commodities  made  by  machinery ;  whereupon  there  fol- 
lows an  excellent  example  of  all  this,  under  cover  of  which 
the  explanation  meanwhile  gets  forgotten ;  which,  by  the 
way,  is  precisely  as  far  as  Ricardo  got,  the  only  difference 
being  that  Ricardo  was  perfectly  aware  that  something 
was  the  matter,  while  Mill  is  not.  In  general,  Alill  appears 
to  hold  by  pain  or  abstinence  cost  as  the  ultimate  explana- 
tion of  interest.  But  if  neither  of  these  things  is  adequate, 
perhaps,  he  thinks,  opportunity  cost  may  have  some  efficacy 
for  the  case." 

But  whatever  may  be  the  explanation,  it  stands  for  true 
that,  because  of  the  differing  degrees  in  which  production 
is  capitalistic,  "every  rise  or  fall  in  general  profits  will 
have  an  effect  on  values ;  not,  indeed,  by  raising  or  lower- 
ing them  generally,  but  by  altering  the  proportions  in  which 
the  values  of  things  are  affected  by  the  unequal  lengths  of 
time  for  which  profits  are  due." 

But  to  return  to  the  cause  underlying  the  values  of  these 
cost  items  of  outlay :  In  the  main  the  explanation  is  found  by 
Mill  in  the  fact  that  these  items  themselves  depend  for  their 
value  on  their  respective  costs  of  production.  When,  how- 
ever, these  are  not  cost  but  scarcity  values,  they  are  equally 
and  similarly  carried  over  as  costs  into  the  value  of  the 
product.  The  typical  case  of  this  sort  of  cost  is  found  with 
limited  natural  agents,  as  water-powers  and  the  like.  But 
these  cases,  not  being  marginal,  have,  as  Mill  appears  to 
think,  no  bearing  upon  value.     And  this  brings  us  to  the 

""[With  Mill]  the  profit  of  capital  is  stated  explicitly  to  be  the 
remuneration  of  abstinence,  but  nothing  is  made  to  depend  on  this. 
Abstinence  is  not  elevated  into  a  position  logically  co-ordinate  with 
labor,  nor  are  the  two  conceived  of  together  as  constituting  subjective 
costs,  as  distinguished  from  entrepreneur's  costs,  consisting  in  profits 
and  wages." — Whittaker,  op,  cit.,  p.   io6. 


6o  VALUE  AND  DISTRIBUTION 

question — does  rent  enter  into  cost?  "No  one  can  deny- 
that  rent  sometimes  does  enter  into  cost  of  production;  if  I 
buy  or  rent  a  piece  of  land  and  build  a  cloth  manufactory 
on  it,  the  ground  rent  forms  legitimately  a  part  of  my 
expenses  of  production  which  must  be  paid  by  the  product." 

But  this  does  not  necessarily  imply  that  the  value  will 
thereby  be  the  greater,  that  is,  that  these  costs  are  value- 
determining.  And  in  chapter  v,  on  "Rent  in  Its  Relation 
to  Value,"  Mill  writes :  "Rent  forms  no  part  of  the  cost 
of  production  which  determines  the  value  of  agricultural 
products" — an  assertion  which  must  stand  either  as  setting 
up  an  entirely  indefensible  distinction  between  agricultural 
and  other  products,  or  as  imposing  the  conclusion  that  not 
all  outlays  involved  in  production  may  be  ranked  as  value- 
determining  costs,  but  only  those  involved  in  marginal 
production — which  opens  up  questions  too  wide-reaching 
for  present  discussion,  viz.,  whether  the  marginal  product 
has  any  peculiar  value-determining  quality,  and  whether,  if 
it  has,  we  shall  find  this  marginal  item  of  product  to  be  a 
marginal-man  item  or  a  marginal-land   item. 

Mill,  however,  elsewhere  says :  "But  when  land  ca- 
pable of  yielding  rent  in  agriculture  is  applied  to  some  other 
purpose,  the  rent  which  it  would  have  yielded  is  an  element 
in  the  cost  of  production  of  the  commodity  which  it  is 
employed  to  produce,"  ^^ — a  most  important  and  much-dis- 
cussed admission — still,  however,  leaving  it  possible  that  no 
influence  upon  value  need  be  inferred,  if  only  it  be  defen- 
sible to  distinguish  between  different  outlays  in  their  bearing 
on  costs;  or,  if  it  be  somehow  possible  to  exclude  these 
cost  rents  from  marginal,  price-determining  outlays.  But 
for  our  present  purposes  it  is  sufficient  to  remark  that  this 
case  of  rent  cost,  accepted  by  Mill,  is  distinctly  an  illustra- 
tion of  the  opportunity-cost  principle. 

In  point  of  fact,  also,  all  this  proof  that  cost  is  impor- 
tant only  as  relative  cost  is,  in  last  analysis,  merely  another 
opportunity-cost  doctrine.  The  main  difference  in  this 
regard  between  Mill  and  Ricardo  is  that  Ricardo  attempted 
far  more  than  did  Mill  in  the  way  of  explaining  the  reduc- 
tion of  wages  and  interest  to  a  basis  of  homogeneity, 
and  of  tracing  the  proportionality  of  outlay  cost  and  of 
market  value  to  the  labor  costs  of  real  value.  Ricardo 
can  hardly  be  said  to  have  succeeded:  Mill  hardly  tried. 
But  it  is,  at  any  rate,  sufficiently  evident  that  capital  and 

"  Mill,  op.  cit.,  Book  III,   chap,  vi,  prop.  g. 


JOHN  STUART  MILL  6l 

labor  services,  under  the  form  of  interest  and  wages,  by 
the  very  fact  that  they  are  producers'  outlays  reckoned  in 
terms  of  money,  have  somehow  for  the  purposes  in  hand 
been  reduced  to  a  common  denominator  of  value.  The 
sheer  obviousness  of  it  all  suffices,  in  Mill's  view,  to  excuse 
him  from  all  labor  of  attention  or  examination. 

But  this  homogeneity  being  assumed  as  a  datum,  some- 
thing is  done  by  Mill  toward  tracing  out  the  determination 
of  these  costs,  non-relatively,  that  is,  as  costs  in  the  ordi- 
nary sense  rather  than  as  ratios  or  distributive  fractions. 
Interest  is  explained  as  determined  through  abstinence  as 
cost, — wages  by  the  proportion  between  capital  and  the 
laborers  employed  by  capital, — profit  by  what  is  left  from 
price  after  the  expenses  of  production  are  covered. 

Nor  does  the  mechanism  by  which  market  value 
becomes  proportional  to  outlay  cost,  or,  more  accurately, 
to  entrepreneur  cost  as  a  whole — rent,  however,  excluded — 
receive  further  elucidation  than  is  contained  in  the  doctrine 
of  the  mobility  of  capital,  which,  by  the  way,  is  a  simple 
application  of  the  principle  of  opportunity  cost.  The  pro- 
portionality of  value  to  profit,  so  far  as  profit  is  some- 
thing other  than  interest,  is  left  to  be  explained  by 
"normals." 


CHAPTER  VI 

CAIRNES 

Cairnes's  special  task  was  the  rehabilitation  of  the  labor- 
cost  theory  of  value,  after  the  damage  visited  upon  it 
through  the  half-hearted  support  or  the  semi-abandonment 
of  John  Stuart  Mill.  In  the  Leading  Principles  Restated, 
labor  cost  is  set  up  as  the  value  determinant — not,  however, 
labor  cost  in  terms  of  time,  but  in  terms  of  pain,  burden, 
irksomeness.  Nor  does  the  doctrine  appear  to  conceive 
labor  as  having  in  itself  and  in  its  own  right,  as  an  expres- 
sion of  pain,  an  independent  value  of  its  own,  which  value 
is,  as  cost,  carried  over  into  the  exchange  value  of  the 
commodities  produced  by  it.  Often  the  thought  is  more 
like  that  of  Ricardo,  in  recognizing,  though  not  with  full 
consistency,  the  principle  of  pr.oportionment  of  value  to  out- 
lay cost;  occasional  recourse,  that  is  to  say,  appears  to  be 
made  to  the  mechanism  of  entrepreneur  expenditure.  But 
on  the  whole  Cairnes's  doctrine  seems  rather  to  be  that  of 
labor-purchase  cost. 

Cost  means  sacrifice,  ....  and  the  problem  of  cost  of  produc- 
tion as  bearing  on  the  theory  of  value,  is  to  ascertain  how  far  and 
in  what  way  the  payment  thus  made  by  man  ....  in  the  barter 
between  him  and  nature,  determines  or  otherwise  influences  the 
exchange  value  of  the  products  which  result.^ 

Under  Cairnes's  treatment  the  issue  between  labor-pain 
cost  and  entrepreneur  cost  is  for  the  first  time  in  English 
economics  clearly  drawn.  Ricardo,  it  is  true,  had  worked 
out  a  doctrine  of  entrepreneur  cost  based  upon  labor  cost 
as  its  underlying  determinant,  but  had  too  often  failed  both 
of  clarity  and  of  strict  consistency  in  preserving  the  sepa- 
rateness  and  the  antithesis.  Senior  had  taken  the  pain-cost 
point  of  view,  but,  scarcely  attempting  the  reconciliation, 
had  over  and  again  lapsed  into  entrepreneur-cost  analysis. 

^  J.  E.  Cairnes,  Some  Leading  Principles  of  Political  Economy 
Newly  Expounded,  chap,  iii,  sec.  5. 

62 


CAIRNES  63 

Mill,  while  in  the  main  an  exponent  of  entrepreneur  cost, 
had,  at  fairly  frequent  intervals,  made  some  more  or  less 
vague  appeal  to  labor-pain  cost  as  basis.  But,  whatever 
else  may  be  said  in  criticism  of  Cairnes,  it  must  be  admit- 
ted that,  in  full  consciousness  of  this  confusion,  he  sets 
himself  earnestly  at  work  to  avoid  it  and  to  make  the  appli- 
cations and  the  limitations  of  the  labor-cost  doctrine  clear 
and  precise. 

But  following  upon  this  preliminary  sketch  of  Cairnes's 
position,  some  detail  of  exposition  and  criticism  is  now 
called  for.  It  is,  indeed,  to  be  admitted  that  as  cost  items, 
choice  must  be  made  between  labor  as  against  wages,  and 
between  abstinence  as  against  interest : 

Of  all  ideas  within  the  range  of  economic  speculation,  the  two 
most  profoundly  opposed  to  each  other  are  cost  and  the  reward  of 
cost — the  sacrifice  incurred  by  man  in  productive  industry,  and  the 

return  made  by  nature  to  man  upon  that  sacrifice Cost  and 

remuneration  are  the  economic  antitheses  of  each  other;  so  com- 
pletely so  that  a  small  cost  and  a  large  remuneration  are  exactly 
equivalent  expressions.* 

But  if,  on  the  other  hand,  wages  and  profits  are  to  be 
accepted  as  the  ultimate  items,  costs,  as  Cairnes  argues, 
must  increase  as  product  increases,  since  wages  and  prod- 
ucts increase  with  product  and  exhaust  the  product;  an 
increase  in  the  general  productiveness  of  industry  would 
require 

that  wages  and  profits  ....  as  an  aggregate  would  rise  exactly 
in  proportion  as  industry  had  become  more  productive,  and  the  cost 
of  producing  a  given  commodity,  measured  in  wages  and  profits, 

would  then  remain  precisely  as  before There  would  be  less 

labor  and  abstinence  exerted,  but  this  smaller  exertion  being  more 
highly  remunerated,  the  cost,  measured  in  the  remuneration,  would 
suffer  no  change:   (ibid.) 

all  of  which,  it  is  to  be  remarked,  is  equally  serious  for 
labor  as  the  value  determinant;  costs,  from  any  point  of 
view,  are  significant,  for  value  purposes,  only  as  ratios,  as 
purely  relative  facts. 

'^  Cairnes,  op.  cit.,  chap,  iii,  sec.  3. 


64  VALUE  AND  DISTRIBUTION 

But  that  solely  in  this  relative  sense  are  entrepreneur 
costs  conceived  by  Mill  to  be  relevant  to  value  is  not  appre- 
ciated by  Cairnes ;  though  he  later  makes  it  quite  clear  that 
in  no  other  than  this  relative  sense  has  labor  cost  any  bear- 
ing on  the  case.^ 

But  his  objection  to  the  wages-and-profit  method  of 
explanation  goes  deeper  than  this ;  he  rightly  condemns  the 
method  as  fundamentally  explaining  nothing;  wages  and 
profits  are  mere  remunerations  for  productive  services ;  as 
later  thought  would  term  them,  they  are  mere  distributive 
shares.  The  various  distributive  shares  do,  of  course, 
exhaust  the  value  product.  But  to  call  them,  or  any  of 
them,  costs,  and  to  suppose  that  thereby  the  value  of  the 
costs  is  explained,  is  the  sheerest  of  circular  reasoning — if, 
indeed,  it  is  not  worse : 

If  it  be  true  that  the  wages  and  profits  received  by  the  pro- 
ducer of  a  commodity  are  the  measure  of  its  cost  of  production, 
then  it  follows  that  all  commodities  whatever,  it  matters  not  under 
what  circumstances  produced,  whether  of  competition  or  of  monop- 
oly, exchange  and  cannot  but  exchange,  in  proportion  to  their  costs 
of  production In  truth,  the  principle  that  "cost  of  produc- 
tion determines  value"  becomes,  when  thus  understood,  little  more 
than  an  assertion  of  an  identical  proposition,  since  it  merely  amounts 

'  This,  as  is  well  known,  is  emphasized  by  Cairnes  with  reference 
to  international  values  and  international  trade,  under  the  principle  of 
comparative  costs.  In  this  connection,  however,  the  case  is  put  by  him 
much  more  strongly  than  it  will  stand :  "International  values  ....  are 
admittedly,  or  at  all  events  are  demonstrably  ....  not  governed  by 
cost  of  production,  and  we  have  thus  normal  values  which  are  not  con- 
nected with  cost,  but  come  under  the  influence  of  some  other  prin- 
ciple  What,   for  instance,   is  now  the  grand   argument  with   the 

people  of  the  United  States  for  the  maintenance  of  protection?  Why 
the  high  cost  of  production  in  that  country  ?  And  what  is  the  evi- 
dence of  this  high  cost  of  production  ?  Simply  the  high  rates  of  wages 
which  prevail.  How,  they  ask,  can  we,  with  our  high-priced  labor, 
compete  with  the  pauper  labor  of  Europe  ?  I  must  frankly  own  that 
accepting  the  point  of  view  of  the  current  theory  of  cost,  I  can  find  no 
satisfactory  reply  to  this  question,  and  I  am  quite  sure  that  Mr.  Wells, 
who  implicitly  adopts  this  point  of  view,  has  wholly  failed  to  furnish 
one"  (Cairnes,  op.  cit.,  chap,  iii,  sec.  4).  Without  doubt,  the  doc- 
trine of  comparative  labor  cost  may  often, — perhaps  commonly  and 
adequately,  cover  this  case ;  but  so  does  the  doctrine  of  comparative 
entrepreneur  cost ;  and  so,  for  that  matter,  would  the  doctrine  of 
displacement  or  opportunity   cost. 


CAIRNES  65 

to  saying  that  values  are  in  proportion  to  the  aggregate  of  the 
elements  of  which  they  are  made  up/ 

It  must,  of  course,  be  held  in  mind  that  all  of  this  dis- 
cussion assumes,  in  conformity  with  the  classical  doctrine 
and  with  Mill's  version  of  it,  that  rent  may  be  and  must  be 
excluded  from  the  cost  category.  But  even  so,  Cairnes's 
attack  looks  to  be  more  serious  than  it  really  is;  this  is  in 
part  due  to  the  ambiguous  use  of  the  term  profit:  Cairnes 
is  using  the  term  as  the  equivalent  of  interest,  the  reward 
of  abstinence.  But  limited  to  this  meaning,  Mill  would  not 
and  could  not  have  assented  to  the  proposition  that  wages 
and  profits  exhaust  the  value  product ;  only  when  the 
unnecessary  profits  as  well  as  the  necessary — the  quasi-rent 
share  as  well  as  the  cost  share  in  the  remunerations  of 
entrepreneurship — are  accounted  for,  can  it  be  said  that 
wages  and  profits  exhaust  the  total  value  product.  In  Mill's 
use  of  terms,  cost  of  production  commonly  falls  considerably 
short  of  the  full  value  of  the  product ;  that  is  to  say,  there 
are  unnecessary  profits ;  there  are,  as  later  thought  would 
put  it,  non-marginal  producers  to  whom  are  accruing  quasi- 
rents  of  production. 

But  for  the  purposes  of  the  present  issue,  the  general 
nature  of  cost,  Cairnes  correctly  interprets  Mill's  position 
and  makes  admirably  clear  the  contrasted  points  of  view : 

Mr.  Mill  discloses  with  perfect  clearness  the  line  of  thought  by 
which  the  view  in  question  has  been  reached :  "What  the  produc- 
tion of  a  thing  costs  to  its  producer,  or  its  series  of  producers,  is 
the  labor  expended  in  producing  it.  //  we  consider  the  producer 
the  capitalist  who  makes  the  advances,  the  word  labor  may  be 
replaced  by  wages:  what  the  produce  costs  to  him  is  the  wages  which 
he  has  had  to  pay."  In  other  words  the  point  of  view  is  shifted 
from  the  ground  of  human  interests  to  the  partial  and  limited 
standpoint  of  the  capitalist  employer;  and  the  cost  of  producing  an 
article,  which  really  consists  of  the  sacrifices  required  of  human 
beings  for  its  production,  is  only  considered  so  far  forth  as  it  is 
"cost  to  him,"  that  much  more  important  portion  of  the  cost  which 
is  cost  to  the  laborer  being  put  altogether  out  of  view.  This  point 
of  view  being  once  taken,  the  rest  follows  simply  and  naturally. 
What  is  cost  to  the  capitalist,  that  is  to  say,  his  advances,  consist- 
ing of  the  profits  of  previous  producers  as  well  as  of  the  wages  of 
laborers,  profits  as  well  as  wages,  must  evidently  be  included  in 
cost;  and  not  only  the  profits  of  previous  producers,  but  ....  the 

*  Cairnes,  op.  cit.,  chap,  iii,  sec.  3. 


66  VALUE  AND  DISTRIBUTION 

profits  of  the  producer  of  that  particular  commodity  whose  cost 
is  considered — an  extension  of  the  theory  which  involves  this 
curious  consequence,  that  among  the  elements  of  the  cost  of  pro- 
ducing a  commodity  is  counted  [part  of]  the  profit  obtained  on  that 
commodity  by  the  producer,  a  profit  which  I  need  scarcely  say  is 
not  realized  till  after  the  commodity  is  produced.  ....  That  the 
laborer's  share  in  the  industrial  sacrifice  is  by  the  current  doctrine 
excluded  from  the  conception  of  cost  of  production  does  not 
appear  to  have  been  seen,  or,  if  seen,  to  have  been  adequately 
appreciated  by  its  adherents.  Mr.  Mill's  language  seems  to  imply 
that  the  wages  advanced  by  the  capitalist,  ....  though  he  admits 
that  they  only  represent  "the  cost  of  producing  to  him,"  may  yet  in 
some  way  be  taken  to  represent  the  cost  to  the  laborers  also,  for, 
having  dealt  with  this  portion  of  the  case,  he  leads  on  to  the 
next  with  the  words :   "Thus  far  of  labor  or  wages,  as  an  element  of 

cost  of  production There  is  also  capital,  etc."     But  I  must 

absolutely  deny  that  wages  can  in  any  way  be  taken  to  represent 
the  labor  element  in  cost  of  production.  Wages,  as  Mr.  Mill 
observed  in  the  passage  already  quoted,  may  be  regarded  as  cost 
to  the  capitalist  who  advances  them ;  though  it  would  perhaps  be 
more  correct  to  say  that,  so  far  as  they  go,  they  measure  his  cost, 
which  really  consists  in  the  deprivation  of  immediate  enjoyment 
implied  in  the  fact  of  the  advance.  But  to  the  laborer  wages  are 
reward,  not  cost ;  nor  can  it  be  said  that  they  stand  in  any  constant 
relation  to  that  which  really  constitutes  cost  to  him." 

Cairnes's  affirmative  position  also  is  clearly  set  forth : 

Cost  means  sacrifice,  and  can  not,  without  risk  of  hopelessly 
confusing  ideas,  be  identified  with  anything  that  is  not  sacrifice.  It 
represents  what  man  parts  with  in  the  barter  between  him  and 
nature,  which  must  be  kept  eternally  distinct  from  the  return  made 
by  nature  on  that  payment.  This  is  the  essential  nature  of  cost: 
and  the  problem  of  cost  of  production  as  bearing  on  the  theory  of 
value  is  to  ascertain  how  far  and  in  what  way  the  payment  thus 
made  by  man  to  nature  in  productive  industry  determines  or  other- 
wise influences  the  exchange  value  of  the  products  which  result." 

Bearing  in  mind,  then,  that  labor-pain  cost  is  here  set 
up  as  the  determinant  of  value,  it  remains  logically  open  to 
Cairnes  to  take  the  position  that  wages  and  profits  are 
results  of  value  and  not  causes — are  distributive  shares 
and  not  costs.  This  is,  in  fact,  his  view ;  product — in  the 
sense  of  value  product — is  the  source  and  determinant  of  all 

*  Cairnes,  op.  cit.,  chap,  iii,  sec.  3.         '^  Ibid.,  chap,  iii,  sec.  4. 


CAIRNES  67 

remunerations.  This,  of  course,  leaves  it  the  more  neces- 
sary to  discover  the  determining  causes  of  value.  Whether 
the  fact  that  value  is  proportional  to  labor  fully  satisfies 
this  requirement  must  for  the  present  be  left  as  an  open 
question.  At  any  rate,  Cairnes  declines  to  admit  that 
wages  and  profits  are  in  any  sense  determinants : 

The  value  of  the  product  resulting  from  industry  forms  .... 
the  source  from  which  ....  industry  is  remunerated.  Nor  is  this 
conclusion  invalidated  by  the  fact  that  ....  the  laborer  commonly 
receives  his  reward  in  the  form  of  wages  advanced  by  the  capitalist 
before  the  product  is  completed ;  since  what  he  receives  is  subse- 
quently recouped  to  the  capitalist,  the  sum  being  drawn  from  the 
value  of  the  product;  so  that  it  is  still  the  value  of  the  product  from 
which  the  remuneration  of  all  concerned  in  the  creation  of  that 
product  ultimately  comes.  Wages  and  profits  in  each  branch  of 
industry  are  thus  derived  from  the  value  of  the  commodities  pro- 
ceeding from  that  branch  of  industry,  and,  as  ...  .  wages  and 
profits  also  absorb  the  whole  of  that  value,  it  follows  that,  other 
things  being  the  same,  the  aggregate  of  wages  and  profits  received 
by  any  given  group  of  producers  will  always  vary  with  the  aggre- 
gate of  the  value  of  the  commodities  which  they  produce.^ 

And  then  follows  this  remarkable  and  important  passage : 
Where  wages  and  profits,  therefore,  in  different  occupations  are 
in  proportion  to  the  sacrifices  undergone,  the  value  of  the  com- 
modities proceeding  from  those  occupations  will  always  be  in  pro- 
portion to  the  same  sacrifices,  that  is  to  say,  the  commodities  will 
exchange  in  proportion  to  their   [labor-pain]  costs  of  production. 

Precisely  how  much  does  this  mean?  Since  it  is  prod- 
uct which  fixes  compensations,  it  must  follow  that  to  assume 
wages  to  be  in  proportion  to  the  sacrifices  undergone  is 
merely  another  way  of  asserting  a  proportionality  of  pro- 
duction results  to  labor  burdens ;  and  so  it  is,  for  example, 
true  enough  that  where  in  two  different  industries  the  value 
products  are  equal,  and  the  pains  of  production  are  equal, 
the  exchange  relations  will  be  those  of  equal  values  for 
equal  labor  pains.  This  is  susceptible  of  being  interpreted 
as  a  mere  mathematical  re-expression  of  the  assumptions 
made.  But  is  there  more  in  it?  Does  the  thought  go  upon 
the  Ricardian  principle  of  proportionment  of  entrepreneur 
cost  to  labor-pain  cost?  Have  we  here  any  attempt  to 
explain  entrepreneur  costs,  or  to  make  use  in  any  way  of 

'  Ibid.,  chap,  iii,  sec.   5. 


68  VALUE  AND  DISTRIBUTION 

the  entrepreneur  mechanism  for  the  purposes  of  the  value 
problem?  The  thought  is  difficult  of  interpretation — per- 
haps impossible  of  interpretation — in  this  regard. 

But  when  and  how  far  will  this  proportionality  between 
the  labor  burdens  invested  in  commodities  and  the  exchange 
relations  of  these  commodities  hold?  To  the  extent  that  the 
proportionality  is  found  to  hold,  and  only  to  this  extent,  and 
for  the  conditions  under  which  it  holds,  and  only  for  these 
conditions,  does  Cairnes  stand  for  the  determination  of 
value  by  labor  cost.  It  may,  indeed,  turn  out  that  this 
labor-cost  determinant  applies  only  within  very  narrow 
limits ;  but,  at  any  rate,  so  far  as  it  may  be  made  to  apply, 
something  will  have  been  done  toward  attaining  an  expla- 
nation of  value  in  terms  of  this  ultimate  cost ;  for  in 
Cairnes's  view  there  is  no  justification  for  talk  of  any  other 
kind  of  cost  than  this  of  labor  pain.  Pain  is  presented  as 
the  condition  on  which  all  commodities,  or,  at  all  events,  all 
freely  reproducible  commodities,  arrive  at  man's  disposal — 
it  is  their  purchase  price,  their  cost  in  the  barter  of  labor 
for  product  between  man  and  nature.  Mill's  fallacy  in  calling 
the  entrepreneur's  outlays  costs  of  production  lay,  Cairnes 
insists,  in  the  patent  fact  that  the  entrepreneur  is  not  the 
producer,  excepting,  of  course,  to  the  extent  that  he  is  him- 
self a  laborer.  Not  the  employer  in  the  shade,  Cairnes 
urges,  but  the  wage-earner  sweating  in  the  sun  is  the 
person  submitted  to  the  pains  of  production.  True,  the 
laborer  gets  a  reward,  a  wage,  more  or  less  adequate ;  but 
this  reward  is  not  his  cost ;  he  is  the  producer — actually, 
visibly,  mechanically,  technologically — and  his  pain  is  the 
cost  through  which  and  on  terms  of  which  human  society 
obtains  possession  of  its  store  of  consumable  goods.  And 
it  is  hopeless  to  attempt  the  justification  of  the  entrepre- 
neur notion  of  cost  as,  in  terms  of  expenditure,  a  market 
expression  of  the  underlying  and  ultimate  labor-pain  reality. 
Ricardo,  it  is  true,  had  attempted  this,  or,  more  accurately, 
had  assumed  it  out  of  hand ;  but  neither  to  Mill  nor  to 
Ricardo  was  it  open;  the  pains  are  not  in  any  constant 


CAIRNES  69 

or  necessary  relation  to  the  wages  received,  else  in  differ- 
ent occupations  and  in  different  countries,  and  at  different 
times  in  the  same  country,  wages  could  not  vary  as  they  are 
found  to  vary. 

If  wages  stood  in  any  constant  relation  to  that  which  really  con- 
stitutes [the  laborer's]  cost,  ....  wages  in  all  occupations,  in  all 
countries,  and  in  all  times  would  he  in  proportion  to  the  severity  of 
the  toil  which  they  recompensed.' 

^  Ibid.,  chap,  iii,  sec.  3. 

Ricardo  had  assumed  without  argument,  that,  as  a  general  proposi- 
tion and  in  broad  averages,  wages  are  paid  in  proportion'  to  the  pain- 
fulness  of  the  employment :  thus  the  entrepreneur  outlays  and  the 
attendant  market  values  become  proportional  to  the  pain  costs  of  real 
value. 

In  full  sympathy  with  this  general  point  of  view,  and  in  the  full 
conviction  that  the  only  definitive  and  really  explanatory  concept  of 
cost  is  the  pain-cost  concept,  Cairnes  is  yet  conscious  that  wages — labor 
cost  to  the  employer — are  in  many  cases  far  wide  of  proportionality  to 
labor  pain.  He  therefore  sets  himself  to  Ricardo's  unfinished  task,  that 
of  finding  out  when  and  why  and  with  what  necessity  of  supplementa- 
tion, the  labor-cost  theory  may  still  be  regarded  as  tenable. 

Ricardo  had  said  that  the  remuneration  must  be  proportionate  to 
the  disutility — the  pain — of  labor,  else  the  laborer  would  change  to 
other  lines  of  production,  and  thereby  a  readjustment  of  supplies  of 
product  and  supplies  of  labor  take  place  so  as  to  bring  the  situation 
back  into  nearer  approach  to  the  normal.  That,  at  the  best,  this 
doctrine  could  go  no  farther  than  to  assert  that  the  compensation  must, 
at  the  niinimnm,  be  proportional  to  the  disutilities,  neither  Ricardo  nor 
Senior  had  ever  perceived :  nor  by  either  had  allowance  been  made 
for  differences  in  skill  and  productiveness  relatively  to  the  pains  of 
productive  effort. 

Cairnes,  however,  makes  this  allowance.  He  sees  plainly  that  the 
rate  of  remuneration  is  derivative  from  the  value  product,  and  the 
distinction  is  clear  in  his  mind  between  mere  weight-and-tale  produc- 
tiveness and  value  productiveness  :  "Under  a  system  of  separation  of 
employments,  industrial  rewards  consist  for  each  producer,  or,  more 
properly,  for  each  group  of  producers,  employed  on  a  given  work,  in 
the  value  of  the  commodities  which  result  from  their  exertions.     I   say 

in  the  value  of  the  commodities  not  in  the  commodities  themselves 

The  value  of  the  product  resulting  from  industry  forms  thus  the  source 
from  which  ....  industry  is  remunerated.  The  laborer  commonly 
receives  his  reward  in  the  form  of  wages  advanced  by  the  capi- 
talist  What  he  receives  is  subsequently  recouped  by  the  capi- 
talist, the  sum  being  drawn  from  the  value  of  the  product ;  so  that  it  is 
still  the  value  of  the  product  from  which  the  remuneration  .... 
comes." — Cairnes,  op.  cit.,  chap,  iii,  sec.  5. 

But  all  of  this  being  true — and  all  of  it  is  in  point  of  fact  true — 
what  have  costs,  in  the  sense  of  pain,  to  do  with  the  case?  How  can 
they  fc«  determinant  of  value  or  value  be  proportional  to  them  ?  The 
labAr  may  be  the  mechanical  cause  of  the  product,  but  with  all  the 
existing   differences   in    skill,   and   with    all    the   differences   in    the    felt 


70  VALUE  AND  DISTRIBUTION 

But  how  far  can  the  principle  that  values  are  propor- 
tional to  the  pains  of  production  be  extended?  Not  tar 
certainly,  and  Cairnes  did  not  claim  it  to  be  far : 

Wages  and  profits  will  be  in  proportion  to  the  sacrifices  under- 
gone wherever,  and  only  so  far  as,  competition  prevails  among 
producers — wherever,  and  so  far  only  as,  laborers  and  capitalists 
have  an  effective  choice  in  selecting  among  the  various  occupations 
presented  to  them  in  the  industrial  field." 

No  perplexity  need  be  caused  by  the  fact  that  the  dis- 
cussion refers  here  only  to  the  proportion  between  remun- 
erations and  pains,  since,  as  Cairnes  has  sufficiently  shown, 
and  as,  in  fact,  all  cost  theories  assume,  values  of  products 
and  remunerations  of  agents  are  parallel,  and  indeed,  sub- 
stantially identical  facts.  But  in  order  that  the  remunera- 
tions be  proportionate  to  the  pains  must  there  not  also  be 
necessarily  implied  an  equality  of  productive  powers? 
Otherwise  it  will  not  be  true  that  "each  competitor,  aiming 
at  the  largest  reward  for  his  sacrifices,  will  be  drawn  toward 
the  occupations  which  happen  at  the  time  to  be  best 
remunerated,"  ^"  but  only  to  the  occupations  in  which  his 
remunerations  are  his  best,  which  is,  by  the  way,  precisely 
the  manner  and  the  direction  in  which  each  and  every  man 
in  actual  society  is  now  drawn.  True,  the  supply  of  prod- 
burden  of  labor,  how  can  labor  be  determinant  or  measure  of  value? — 
that  is,  be  that  kind  of  cost  which  will  express  itself  in  exchange  values 
and  determine  them?  For  this  Cairnes's  answer  is  that  among  men  of 
the  same  grade  of  skill,  and  under  substantially  similar  conditions — 
and  only  here — can  it  be  said  that  painfulness  of  employment  commands 
wages  to  correspond :  so  only  here  are  "wages  and  profits  ....  in  pro- 
portion to  the  sacrifices  imdergone,"  and  therefore  here  only  is  it  true 
that  "the  value  of  the  commodities  proceeding  from  these  occupations 
will  also  be  in  proportion  to  the  same  sacrifices,  that  is  to  say  .... 
will  exchange  in  proportion  to  their  costs  [pain  costs]  of  production." — 
Cairnes,  op,  cit. 

But,  nevertheless,  Cairnes  was,  in  point  of  vierv,  essentially  right ; 
entrepreneur  cost  is  at  the  best  a  superficial  explanation  of  value,  and, 
as  explanation  of  any  sort,  is  valid  only  for  a  competitive,  pecuniary, 
exchange  economy.  Cairnes  was  groping  toward  a  general  value  doc- 
trine which  should  base  the  supply  category  upon  cost  in  terms  of 
charge  or  draught  upon  the  life  and  the  life  values  of  the  human  race  ; 
if,  over  against  this  life  cost,  on  the  supply  side,  there  could  be  worked 
out,  on  the  demand  side,  a  value-in-use  or  utility  calculus  expressive  of 
service  for  the  life  processes  and  life  purposes  of  the  genus  homo, 
value,  as  the  point  where  human  utility-demand  forces  are  equated 
against  pain-supply  resistances,  could  fairly  present  itself  as  ultimate 
interpretation  and  explanation  of  the  economic  process  in  society. 

^  Ibid.,  chap,  iii,   sec.  5.  ^^  Ibid.,  chap,   iii,   sec.   5. 


CAIRNES  71 

nets  proceeding  from  "the  better  paid  employments  will 
then  be  increased,  and  that  from  the  less  remunerative 
reduced,"  but  only  upon  the  assumption  of  equal  skill  and 
effectiveness  in  production  will  this  process  continue  "until 
supply,  acting  on  price,  corrects  the  inequality" :  otherwise 
than  upon  this  assumption  these  inequalities  can  never  be 
corrected  so  as  to  make  A's  reward  stand  to  A's  sacrifice 
as  B's  reward  is  to  B's  sacrifice,  that  is  to  say,  so  as  to 
bring  "remunerations  into  proportion  with  the  sacrifice 
undergone." 

But  it  is  further  to  be  noted  that  in  order  to  make  this 
pain-proportion  doctrine  tenable  it  must  not  only  be  assumed 
that  all  men  concerned  in  it  are  alike  in  their  productive 
capacity  and  in  their  aversion  to  productive  effort,  but  also 
that  they  are  alike  with  respect  to  the  forces  of  temptations 
playing  upon  them  to  divert  them  toward  non-productive 
activity ;  and — what  is  still  more  difiicult — it  must  be 
assumed  that  each  man  taken  separately  is  always  at  one 
and  the  same  level  of  skill,  of  feeling-attitude  toward  labor, 
and  of  feeling-attitude  toward  the  diverting  temptations. 
Free  and  unlimited  competition  is,  therefore — but  in  a 
much  more  limited  sense  than  Cairnes  had  in  mind,  and 
perhaps  hardly  even  then — "the  security  for  the  correspond- 
ence of  industrial  remunerations  with  sacrifice,  and  also, 
and  because  it  is  so,  the  security  for  the  correspondence 
of  the  value  of  commodities  with  their  costs  of  production."^^ 

But  how  far  and  under  what  conditions  did  Cairnes 
believe  his  principle  of  labor  cost  adapted  to  function  as  the 
determinant  of  values? 

Only  under  conditions  of  free  and  equal  competition — 
that  is  to  say,  only  within  certain  industrial  groupings 
termed  by  him  non-competitive  groups — non-competitive  in 
the  sense,  that  is,  that  this  free  and  equal  competition  is 
not  to  be  found  across  group  lines  and  between  the  differ- 
ent groups,  but  only  inside  each  group  and  between  the  dif- 
ferent members  of  that  group :  "What  we  find,  in  effect, 
is,  not  a  whole  population  competing  indiscriminately  for 
all  occupations,  but  a  series  of  industrial  layers,  within 
each  of  which  the  various  candidates  for  employment  pos- 
sess a  real  and  effective  power  of  selection,   while  those 

"  Ibid,^  chap,  iii,  sec.  5. 


72  VALUE  AND  DISTRIBUTION 

occupying  the  several  strata  are,  for  all  purposes  of  effective 
competition,  practically  isolated  from  each  other."  And 
inside  these  different  non-competitive  groups  Cairnes 
believes  competition  to  be  an  effective  fact,  with  the  pro- 
duced values  and  their  remunerations  proportionate  to  the 
pains  of  production.  The  foregoing  criticism  is,  therefore, 
not,  for  the  most  part,  to  be  understood  as  bearing  upon  the 
doctrine  of  non-competitive  groups,  but  only  upon  the 
incompleteness  and  inaccuracy  of  the  description  thus  far 
given  of  the  nature  of  the  group  within  which  the  competi- 
tion proportion  holds.  Surely,  for  whatever  it  is  worth,  it 
must  be  admitted  that  groups  of  this  product-and-sacrifice 
equality  sort  could  be  imagined,  and,  indeed,  may  be  theo- 
retically constructed,  in  which  the  doctrine  set  up  by 
Cairnes  might  find  itself  illustrated. 

Possibly  enough,  also,  the  proportionality  of  remuneration 
to  sacrifice  might  be  established,  were  sacrifice  interpreted 
to  include  not  merely  the  burdens  and  pains  of  pro- 
duction but  as  well  the  foregoing  of  alternative  opportuni- 
ties of  product  or  of  recreation.  This,  however,  is  not 
Cairnes's  thought,  but  only  that  the  exchange  ratios  must 
be  conformed  to  the  direct  disutilities  of  production,  else 
such  a  readjustment  would  take  place  in  the  application  of 
productive  powers  as  to  allow  of  a  larger  result  in  utility 
relatively  to  the  discomforts  imposed.  And,  as  we  have 
seen,  there  are  cases  in  which  the  doctrine  would,  at  first 
sight  at  least,  appear  to  hold ;  and  other  cases  also  might  be 
admitted,  if  only  still  other  conditions  were  accepted  as 
limitations ;  no  serious  difficulty  would,  for  example,  attach 
to  the  doctrine  when  applied  to  the  Crusoe  case,  if  only 
Crusoe's  environment  were  homogeneous  in  opportunity 
and  Crusoe  were  himself,  on  all  days  and  during  each  hour 
of  every  day,  a  constant  in  strength,  in  zeal,  and  in  need; 
or  the  doctrine  would  be  adequate  for  a  collectivist  society, 
if  together  with  homogeneity  of  opportunity  there  were  a 
society  made  up  of  men  each  unchanging  as  an  individual, 
and  absolutely  like  all  of  his  fellows  in  his  feeling-attitude 
toward  labor  and  toward  the  products  of  labor — or  ade- 
quate for  a  competitive  society  made  up  of  precisely  similar 
human  beings,  each  of  whom  was  self-employed  as  an  inde- 


CAIRNES  73 

pendent  producer,  in  an  environment  affording  no  differ- 
entials of  advantage  from  either  land  or  capital. 

And  now  we  inquire  as  to  the  basis  upon  which,  in 
Cairnes's  view,  the  non-competitive  group  is  constituted 
and  as  to  the  extent  to  which  these  groups  may  be  regarded 
as  actual  facts  in  modern  competitive  society.  For  a 
society  of  this  sort  to  fulfil  Cairnes's  requirements,  more  is 
necessary  than  that  there  exist  what  is  commonly  regarded 
as  freedom  of  competition ;  for  both  capitalists  and  labor- 
ers not  merely  the  legal  right  but  the  practical  power  must 
exist  of  effective  choice  between  occupations,  without 
obstruction  of  law,  ignorance,  or  poverty,  so  that  the  pro- 
ducer may  pass  freely  from  the  less  to  the  more  lucrative 
occupation ;  otherwise  "there  can  be  no  security  .... 
that  remunerations   shall   be  brought  into  correspondence 

with  sacrifice How  far  does  competition  in  this 

sense  prevail  in  this  and  other  industrial  communities?"^^ 
It  is  admitted  by  Cairnes  that  a  great  measure  of  immobility 
attaches  to  both  capital  and  labor — that  capital,  "once  em- 
bodied in  a  form  suited  to  actual  work  ....  is  for  the 
most  part  incapable  of  being  turned  to  other  uses,"  and 
that  "the  difficulty  of  transferring  labor  ....  is  even 
greater,  since  we  are  here  in  contact  with  mental  as  well  as 
physical  obstacles."  But  while  all  this  is  true,  it  is  likewise 
true  that  not  all  labor  need  be  mobile  in  order  to  have 
sufficient  mobility  for  the  case ;  new  laborers  are  all  the  while 
maturing.  So  with  capital ;  enough  is  mobile  to  make,  in 
conjunction  with  the  streams  of  new  supply,  a  total  of 
mobility  sufficiently  large  to  care  in  a  reasonably  short  time 
for  irregularities  as  they  arise. 

And  it  is  further  admitted  that  this  new  labor  is  not  in 
nature,  in  intelligence,  or  in  acquired  skill,  adapted  to  all 
occupations  equally;  at  the  best  the  choice  is  within  certain 
tolerably  well-defined  limits;  and  it  is  as  subject  to  these 
limitations  and  restrictions,  and  by  virtue  of  them,  that  non- 
competitive groups  are  constituted ;  and  it  is  only  within 

^  Ibid.,  chap,  iii,  sec.  5. 


74  VALUE  AND  DISTRIBUTION 

these  groups  that  competition  is  effective  and  that  the  prin- 
ciple of  cost  of  production  as  a  pain  quantity  can  be  traced 
in  the  determination  of  vahie.  This  limitation  or  failure  in 
the  cost  principle  does  not,  however,  manifest  itself  with 
capital,  but  only  with  labor. 

"Thus  all  the  products  of  unskilled  labor  will,"  it  is  said, 
"exchange  for  each  other  in  proportion  to  their  costs ;  as  will 
also  all  the  products  of  ordinary  artisan  labor  as  among 
themselves."  ^^  This  equality  may  extend  from  one  depart- 
ment of  production  to  another,  e.  g.,  from  barometers  to 
watches,  if  the  lines  of  exclusion  are  not  applicable.  It  is 
only  within  such  relations  of  equality  that  cost  can  be  a 
proportioner  of  value. 

Cairnes  has  now  to  take  account  of  the  fact  that  many 
commodities  are  the  product  of  labor  belonging  to  differ- 
ent industrial  circles  or  levels  :    What  then  ? 

So  far  as  the  two  commodities  are  the  products  of  workers  in 
competition  with  each  other,  their  values  will  be  governed  by  cost 
of  production;  but  so  far  as  they  proceed  from  workers  not  in  com- 
petition, they  must  be  governed  by  that  other  principle" 

yet  to  be  expounded — demand  and  supply. 

And  here  again  we  stop  to  question,  not  the  group  idea, 
for  this  is  perhaps  intelligible,  but  the  basis  of  the  grouping 
as  it  lay  in  Cairnes's  mind.  Is  it  a  grouping  of  laborers 
according  to  lines  of  occupation  precisely  or  substantially 
similar?  Or  is  it  a  grouping  cutting  across  these  occupa- 
tion classifications  and  conforming  to  levels  of  ability?  And 
what  shall  be  the  test  of  grading  for  ability,  if  not  the 
wages?  And  as  to  the  equality  of  laborers  inside  the  group 
or  the  equality  in  the  pain  quality  of  their  labor — the  group 
homogeneity — one  doubts.    And  in  view  of  the  fact  that, 

the  bulk  of  the  value  of  each  commodity  follows  one  law — say  the 
law  of  cost,  or  what  we  shall  afterward  find  to  be  the  law  of 
reciprocal  demand,  while  a  small  remaining  portion  is  governed  by 
a  different  principle," 

the    determination    of   value    gets   passably    indeterminate. 
1=  Cairnes,  op.  cit.  "  Ibid.  "  Ibid. 


CAIRNES  75 

Certainly,   as   Cairnes   explicitly   admits,   it  cannot  be   that 

we  are 

justified  in  asserting  that  the  commodities  in  question  exchange  .... 

in  proportion  to  their  costs  of  production We  can  only  say 

that  they  [the  values]  are  so  mainly  and  in  their  chief  ele- 
ments  The  true  conception  of  a  law  of  costs  is  thus,  not  a 

law  governing  universally  the  values  of  any  class  of  commodities, 
but  that  of  one  governing  the  values  of  certain  commodities 
in  certain  exchanges.'" 

The  pain  of  labor  is  treated  by  Cairnes  partly  as  a 
matter  of  duration;  but  the  product  must  also  compensate 
in  value  for  the  dangerous  quality  of  the  labor  required; 
otherwise,  one  infers,  the  labor  will  change  to  less  hazard- 
ous employments.  But  Cairnes  deliberately  takes  no  account 
of  skill  as  value-determining:  "Skill  is  no  part  of  cost; 
and  I  add  that  no  article  is  dearer  than  another  simply  in 
virtue  of  the  skill  bestowed  upon  it."  ^^  But,  of  course, 
skill  may  be  the  result  of  labor  or  of  abstinence  in  its 
acquirement,  and  in  such  case  it  would  be  an  element  of 
cost.  Cost-ivisc,  the  increase  in  value  is  not  in  proportion 
to  the  skill,  but  to  the  cost  of  acquisition  of  the  skill.  And 
thus  the  group  appears  to  contract  yet  more  and  to  include 
only  those  producers  who,  experiencing  equal  disutility  in 
labor,  and  reaping  equal  returns  in  product,  fulfil  also 
the  condition  that  their  qualities  and  capacities  were  obtained 
through  a  training — or  lack  of  training — of  precise  equality 
in  point  of  pains  and  burdens.    But,  Cairnes  says, 

As  a  matter  of  fact  the  products  of  most  kinds  of  skilled  labor 
exchange  against  those  of  unskilled  in  a  proportion  much  more 
favorable  to  the  former  than  cost  of  production  ....  would  pre- 
scribe. But  ....  when  the  products  of  skilled  labor  command 
these  high  terms  of  exchange,  the  conditions  of  production  are  not 
those  in  which  cost  of  production  would  give  value."^ 

And  sometimes,  it  is  remarked,  works  of  high  literary 
and  scientific  excellence  get  lower  compensations  than 
lower  degrees  of  skill  command. 

But  here  as   elsewhere  there   is   no   intimation  of   the 

"/fcid.  "Ibid.,  chap,   iii,   sec.  6.  ^^ Ibid. 


76  VALUE  AND  DISTRIBUTION 

manner  by  which  abilities  are  rated  as  higher  or  lower. 
"No  more  is  this  elevated  value  due  to  the  skill  which  such 
products  represent,  but  to  the  circumstances  which  limit  the 
possession  of  the  skill  to  a  small  number  of  persons  as  com- 
pared with  the  demand  for  these  services."  ^® 

But  in  a  note  attention  is  called  to  the  fact  that  the  di 
cussion  "relates  to  skill  of  different  kinds  as  existing  in  the 
different  departments  of  industry.  Within  the  limits  of  the 
same  trade  or  profession,  differences  of  skill  will,  in  gen- 
eral, be  accompanied  with  corresponding  differences  of 
remuneration."  But  here  again  no  notice  is  taken  of  the 
difficulty  of  measuring  skill  otherwise  than  according  to 
the  amount  of  remuneration.  And  there  seems  to  be  entire 
unconsciousness  that  in  admitting  this  difference  of 
remuneration  inside  the  same  industry,  it  must  follow,  either 
( I )  that  differences  in  skill  always  correspond  to  differ- 
ences in  cost  of  attainment,  or  (2)  that  the  group  contem- 
plated by  the  doctrine  is  an  ability-and-pain  rather  than  an 
occupation-and-pain  classification.  Surely,  if  the  classifi- 
cation is  one  of  ability,  remunerations  will  be  the  same,  if 
ability  is  measured  according  to  remuneration ;  but  is  it  to 
be  assumed  that  the  remuneration  is  proportional  to  costs 
of  attainment?  And  if  the  group  is  constituted  by  those 
only  whose  costs  correspond  at  the  same  time  with  their 
ability  and  remunerations,  whence  shall  such  a  group  be 
selected?  But  in  point  of  fact,  Cairnes  appears  to  admit 
that  all  cases  where  values  remunerate  forms  of  skill  not 
acquired  through  labor  burden  are  cases  where  the  labor- 
pain-cost  principle  does  not  apply — that  is  to  say,  are  cases 
falling  under  the  principle  of  "monopoly."  Seemingly  also, 
rent  remunerations  fall  under  the  monopoly  principle,  and 
capital  remunerations  would  do  so  but  for  the  fact  that  the 
creation  of  capital  is  presented  as  having  a  homogeneous 
pain  cost  in  the  abstinence  involved. 

To  Cairnes,  as  we  have  seen,  it  seems  clear  that  the 
principle  of  outlay  based  upon  the  market  value  of  the  pro- 
ductive agents  employed  cannot  be  an  ultimate  basis  and 
explanation  of  the  market  value  of  the  commodity  product. 
"Employers,  we  are  told,  cannot  afford  to  pay  any  class  of 
workers  more  than  their  services  are  worth.  Now  what  is 
the  standard  of  worth  here  adopted?"     It  cannot  fairly  be 

"  Cairnes,  op.  cit. 


CAIRNES  77 

replied  that  the  services  are  worth  what  they  command,  if 
this  is  offered  as  an  explanation  of  cost,  for  this  would  be 
to  explain  value  by  cost  and  then  cost  by  value, — the  old 
difficulty  of  how  to  stand  firmly  with  both  feet  in  the  air : 

According  to  this  conception  of  "worth"  the  statement  that  wages 
are  low  because  the  services  they  remunerate  are  of  little  worth, 
and  high  because  the  worth  of  the  services  is  high,  merely  means 
that  wages  are  high  or  low  because  they  are  high  or  low,  which 
does  not  greatly  elucidate  the  problem.^" 

Or  if  the  standard  of  worth  is  referred  to  "the  actual 
terms  of  the  exchange,  it  amounts  to  saying  that  employers 
cannot  afford  to  pay  their  workmen  more  than  they  actually 
do  pay  them."  It  seems  clear  to  Cairnes  that  the  notion  of 
"worth  as  something  varying  with  the  utility  embodied  in 
the  services  or  ...  .  with  the  skill  which  is  productive 
of  utility,"  -^  is,  as  an  explanation  of  cost  or  of  value,  the 
sheerest  of  circular  reasoning ;  as,  indeed,  it  is,  unless  some- 
thing can  be  done  for  the  case  from  some  other  point  of 
view.  And  yet  Cairnes  applies  the  same  notion  to  explain 
the  different  wages  "within  the  limits  of  the  same  trade," 
but  refers  it  all  to  the  monopoly  principle  working  through 
demand  and  supply,  and  denies  that  it  is  a  question  of  cost 
in  any  sense.  All  of  which  seems  to  inean  that  this  principle 
of  pain  cost  is  a  good  working  principle  wherever  it  will 
apply — which  is,  as  Senior  showed,  passably  rare,"  even 
upon  the  assumption  that  the  severity  and  irksomeness  of 
labor  are  not  as  variable  in  quantity  and  quality  as  are  men 
in  industry,  capacity,  and  feeling. 

There  is,  however,  one  resource  for  the  case  still  untried, 
and  to  this  Cairnes  proceeds  to  appeal ;  it  is  the  principle  of 
averages,  with  especial  reference  to  capital  costs.  Those 
who  deny  the  actuality  of  abstinence  pain  and  the  necessity 
of  its  remuneration,  if  capital  is  to  be  had  for  productive 
purposes,  must  be  supposed 

to  regard  the  act  of  abstaining  from  present  enjoyment  as  in  itself 
agreeable,  and,  coupled  with  the  risk  which  always  attends  abstinence 

'^Ibid.  ''Ibid.  ''See  page  50,  ante. 


78  VALUE  AND  DISTRIBUTION 

when  practised  for  industrial  purposes,  as  constituting,  in  some 
inscrutable  way,  irrespective  of  the  gains  which  flow  from  it,  its 
own  reward  ^' — 

as,  we  may  remark,  is  sometimes  the  case,  though  clearly 
not  to  an  extent  to  supply  the  full  existing  amount  of  capi- 
tal. And  even  assuming  the  saving,  it  does  not  follow, 
Cairnes  rightly  insists,  that  these  savings  would  be  placed 
at  the  disposal  of  industry.  So  self-denial  is  posited  as  the 
underlying  fact,  whereby  the  furnishing  of  capital  becomes 
a  cost  in  the  pain  sense  of  the  term. 

But  of  the  fact  that  "the  sacrifice  involved  in  a  given 
act  of  abstinence  is  very  different  in  the  case  of  different 
persons  or  at  different  times  for  the  same 'persons,"  Cairnes 
says  we  are  to  take  no  account :  "The  sacrifices  .... 
which  govern  exchange  value  are,  not  those  undergone  by 
A,  B,  or  C,  but  the  average  sacrifices  undergone  by  the 
class  of  laborers  or  capitalists  to  which  the  producers  of 
the  commodity  belong."  ^* 

But  one  stops  here  to  object  that  in  this  application  of  the 
group  idea  we  have  a  sort  of  group-abstinence  jelly,  as 
before  we  found  for  labor — as  qualified  by  skill — a  group- 
labor  jelly : 

We  may  therefore  state  broadly  that  differences  in  the  sacri- 
fices incident  to  production,  whether  of  labor  or  of  abstinence, 
which  are  due  to  peculiarities  either  in  the  physical,  mental,  or 
moral  circumstances  of  individuals,  are  to  be  excluded  from  consid- 
eration in  estimating  cost  of  production.  What  we  have  to  do  with 
is,  not  individual  sacrifice,  but  the  average  sacrifice  of  each  indi- 
vidual class.'° 

But  precisely  how  average  sacrifices  could  assign  indi- 
vidual men  to  this  or  that  line  of  activity  or  to  this  or  that 
industrial  group,  is  not  discussed ;  and  why  the  average 
sacrifice  should,  as  a  question  of  cost,  have  anything  to  do 
with  the  individual  remuneration  is  not  clear.  Nor  evi- 
dently would  the  case  be  better  for  Cairnes's  purposes  if 
the  concept  of  margins  were  substituted  for  that  of  aver- 
ages; the  same  or  greater  inequality  of  ratios  between 
pain  and  remuneration  would  still  obtain. 

^  Cairnes,  op.  cit.,  chap,  iii,  sec.  6.  '*  Ibid,  "^  Ibid, 


CAIRNES  79 

But  Cairnes's  answer  to  all  this  would  probably  be  that 
within  the  group  a  more  detailed  and  accurate  distribution 
takes  place ;  the  discussion,  at  the  point  in  hand,  having 
only  to  do  with  that  cost  which  bears  upon  market  value, 
and  the  thought  facing  not  in  the  direction  of  distribution 
but  of  cost.  In  fact,  all  the  way  along  in  this  part  of  the 
argument,  criticism  is  especially  difficult  because  of  diffi- 
culties of  interpretation ;  it  is,  as  we  have  seen,  impossible 
to  make  out  of  what  sort  these  groups  are — whether  con- 
stituted on  the  basis  of  the  class  of  commodities  produced, 
or  of  the  pains  of  production,  or  of  the  skill  applied,  or  of 
the  rate  of  remuneration  received.  If  distribution  inside 
the  group  is  made  to  depend  upon  relative  pain,  it  is  hard  to 
see  how  the  grouping  can  be  either  by  skill  or  by  product; 
and  yet  it  is  clear  that  the  grouping  cannot  be  by  compen- 
sation or  by  pain.  So,  precisely  of  what  constitution  the 
labor  jelly  must  be  in  order  that  the  average  of  sacrifice 
should  govern  the  exchange  ratios  is — at  all  events  to  the 
present  writer — incapable  of  determination. 

And  in  any  case,  the  detail  by  which  values  come  to  be 
proportional  to  sacrifices — for  after  all  the  doctrine  seems 
to  be  essentially  one  of  proportions — needs  elucidation. 
Whether  we  have  labor  as  direct  determinant  through  pain, 
or  as  proportioner,  or  as  common  denominator  measure,  is 
past  making  out  with  anything  approaching  certainty. 
Sometimes  there  is  a  suggestion  of  opportunity  cost,  but 
referring  strictly  to  the  laborer  or  to  the  abstainer  as  against 
the  employer  or  the  borrower ;  that  is  to  say,  the  relative 
attractiveness  of  different  industries  is  calculated,  not 
purely  on  the  basis  of  burden,  but  in  part  upon  the  basis  of 
the  remuneration  as  somehow  related  to  the  burden. 

What  at  bottom  maintains  the  connection  between  value  and 
cost  of  production  is,  it  must  always  be  remembered,  the  power  of 
choice  residing  in  laborers  and  capitalists  to  decide  between  dif- 
ferent occupations.  Now  what  is  it  determines  the  choice?  No 
doubt  the  prospects  of  the  pursuit,  the  remuneration  being  com- 
pared with  the  sacrifice.  But  what  sacrifice?  ....  Each  takes 
account  of  the  incidents  of  the  course  proposed,  as  it  bears  upon 
himself,  and  considers  how  it  stands  with  others  equally  open  to 
him.'' 

But  here  it  must  be  objected  that  just  so  far  as  the 
question  is  one  of  remuneration  it  is  not  one  of  burdens — 

""  Ibid. 


8o  VALUE  AND  DISTRIBUTION 

that  is,  it  is  not  a  question  of  cost  in  Cairnes's  sense  of  the 
word,  but  at  best  is  only  for  each  individual  a  question  of 
the  most  desirable  ratio  between  burden  and  remuneration — 
this  ratio  of  pain  to  compensation  differing  with  each  dif- 
erence  "in  the  physical,  mental,  or  moral  circumstances  of 
individuals."  And  if,  for  the  case,  refuge  should  again 
be  taken  in  the  doctrine  of  averages,  the  reply  would  be  a 
fair  one  that  men  do  not  choose  occupations  or  change 
occupations  on  this  average  basis. 

At  any  rate,  Cairnes  puts  it  that  "carried  over  into  any 
field  of  industrial  competition,"  individuals  are  not  remun- 
erated in  conformity  with  the  sacrifice  which  each  under- 
goes ;  but  the  conformity  holds 

among  the  aggregates  of  those  engaged  in  the  several  competing 
occupations ;  so  that  the  total  remunerations  falling  to  each  branch 
of  industry  shall  bear  the  same  proportion  to  the  total 
sacrifices  undergone  in  that  branch  as  the  total  remunera- 
tion falling  to  any  other  in  the  same  field  .[industry?  grade  of 
labor?]  bears  to  the  sacrifices  in  that  other.^' 

The  total  remuneration  is,  as  we  have  seen,  the  value  of 
the  total  product ;  "this  value,  therefore,  will  bear  the 
same  proportion  to  the  sacrifices  undergone  in  producing 
it,  as  the  value  proceeding  from  any  other  industry  within 
the  same  field  of  competition  bears  to  the  sacrifices  of 
which  it  is  the  result."  ^*  So  the  sacrifices  constituting  cost, 
in  any  field,  class,  or  group,  are  average  sacrifices.^^ 

But  after  all  we  are  inclined  to  ask  ourselves  whether 
the  clue  to  all  this  is  not  in  the  fact  that  a  group  means 

'^Cairnes,  op,  cit,  ^ Ibid. 

"°  "The  relation  which  competition  establishes  between  cost  and 
value  is  one,  not  between  the  value  of  particular  commodities  and  the 
sacrifices   of  the   individual  .  .  ,  .  but   one  between    commodities   taken 

as  sorts  and  their  costs  of  production We  cannot,  for  example, 

assert  that  a  particular  pair  of  shoes  will  exchange  against  a  par- 
ticular coat  in  proportion  to  the  sacrifices  undergone  respectively  by 
the  shoemaker  and  the  tailor  in  the  actual  case ;  but  we  may  assert 
that,  within  a  given  field  of  competition,  shoes,  as  one  sort  of  com- 
modity, will  exchange  ag'ainst  coats  in  this  proportion.  The  costs, 
therefore,  to  which  the  values  of  particular  commodities  correspond  are 
not  the  particular  sacrifices  undergone  in  producing  each  commodity, 
but  the  average  sacrifice  undergone  in  producing  each  sort  of  com- 
modity ....  what  we  have  to  do  with  is,  not  individual  sacrifice,  but 
the  average  sacrifice  of  each  individual  class." — Ibid.,  chap,  iii,  sec.  6. 


CAIRNES  8l 

nothing  more  than  those  producers  with  whom  there  exists 
the  same  ratio  between  sacrifices  and  remunerations. 
Surely,  for  a  group  of  this  sort,  values  would  be  propor- 
tionate to  sacrifices. 

But  finally,  it  is  to  be  remembered  that  Cairnes  does 
not  claim  any  very  wide  field  for  his  doctrine:  it  holds 
simply  where  it  holds,  and  where  it  does  not  hold  the  law 
of  demand  and  supply — reciprocal  demand,  as  Cairnes  terms 
it — is  adequate ;  perhaps  also,  we  may  add,  for  the  cases, 
if  any,  where  it  does  hold.^*' 

If,  then,  this  review  of  Cairnes  is  adequate,^^  and  if  this 
attempt  at  rehabilitation  of  the  labor-cost  doctrine  of  value 
is  really  the  best  that  can  be  done,  as  it  is  the  last  important 
and  systematic  attempt  among  English  economists,  an 
impartial  judgment  will  probably  declare  that  the  efifort 
has  served  merely  to  give  the  doctrine  its  coup  de  grace ; 
a  dogma  already  in  its  last  gasp  has  been  unkindly  done 
to  in  the  house  of  its  friends. 

If,  however,  any  faith  should  still  remain  in  it  for  any 
purpose  there  is  in  reserve  a  seemingly  final  and  crushing 
argument  against  it,  if  once  there  can  be  established  the 
possibility    of    values    and    exchanges    without    anything 

^'*  "The  law  of  reciprocal  demand  fails  completely  of  being  a 
principle  co-ordinate  with,  and  similar  to,  that  of  costs.  Instead  of 
ruling  exchange  values  in  the  same  way  as  cost  of  production,  only  in 
another  field,  it  turns  out  that  the  force  of  reciprocal  demand  is 
incapable  of  determining  the  value  of  any  single  good The  pur- 
port of  the  argument  of  Cairnes  is  no  more  than  this :  the  law  of 
reciprocal  demand  merely  requires  the  general  level  of  international 
exchanges  to  be  such  that  in  the  long  run  the  exports  of  a  nation  just 
discharge  its  liabilities,  or,  in  other  words,  that  its  exports  and  imports 
will  be  led  to  balance,  except  for  the  payment  of  interest  on  foreign 
debts,  cost  of  carriage  to  foreign  ship-owners,  etc.  Cairnes  applies  the 
law  without  changing  line  or  point  to  interchange  between  non- 
competing    groups Cairnes's     famous     doctrine     merely     adds 

emphasis  to  a  point  already  made  by  Senior,  namely,  that  the  wages  of 
skilled  labor  are  out  of  proportion  to  the  amount  of  labor  cost 
remunerated.  Though  Cairnes  rejected  the  definition  of  cost  as  entre- 
preneur's cost,  his  whole  argument  signifies  that  subjective  cost,  or 
pain-cost,  can  control  market  value  only  by  way  of  controlling  the  wages 

and    interest    elements    which    compose    entrepreneur's    cost The 

doctrine  of  non-competing  groups  signifies  that  the  comparative  wages 
cost  of  different  commodities  may  fail  to  represent  their  comparative 
labor  costs,  or  specifically,  that  they  do  so  fail,  when  we  compare  the 
costs  of  commodities  produced  by  different  non-competing  groups." — 
Whittaker,  op.  cit.,  p.   123. 

^  I  am  not,  however,  sure  that  it  is  adequate.  I  confess  to  a  deal 
of  bewilderment.  I  can  only  claim  to  have  tried  to  understand,  but 
this  without  much  confidence  in  my  accomplishment. 


82  VALUE  AND  DISTRIBUTION 

remotely  resembling  labor-pain  cost  in  the  Senior-Cairnes 
interpretation  of  the  term,  or  in  any  interpretation  yet  con- 
sistently formulated.     Let  us  see : 

In  view  of  the  fact  that  each  independent  producer  has 
his  evening  limit  of  labor  at  which  more  product  is  at  the 
point  of  indifference  as  against  more  effort,  and  in  view  of 
the  old-time  doom  that,  for  society  as  a  whole,  it  is  only 
by  the  sweat  of  the  brow  that  bread  may  be  had,  there 
might  appear  to  be,  for  some  purposes,  force  in  the  labor- 
cost  doctrine.  And  if  it  is  objected  that  work  is  oftentimes 
pleasant,  that  there  are  countless  producers  happy  in  their 
work — a  veritable  bliss  of  toil — it  is  none  the  less  evident 
that  as  long  as  the  desire  for  product  remains  unsaturated, 
as  long  as  more  would  still  be  desirable,  as  long,  that  is, 
as  the  product  still  retains  utility  to  the  individual  pro- 
ducer, so  long  work  must  be  sharply  distinguished  from 
play ;  so  long  must  work  be  carried  beyond  the  point  to 
which  it  would  go  for  the  mere  joy  of  the  working.  And 
it  may  thus  be  argued  that  a  positive  pain  cost  will  still  at 
the  margin  bar  the  way  against  any  possible  pleasure 
economy  in  the  productive  process. 

But  even  so,  the  theory  of  labor  cost  by  averages  or  by 
any  scheme  of  proportion  between  pains  and  values,  could 
derive  small  support  from  this  marginal  development  of 
the  labor  doctrine,  so  far  as  it  should  purport  to  serve  as  a 
method  of  explaining  the  terms  of  exchanges  in  a  com- 
petitive, unhomogeneous,  wage-earning  society.  Some- 
thing, however,  might  be  made  out  of  the  doctrine  as  apply- 
ing to  an  isolated — a  Crusoe — economy,  or,  by  averages,  to 
a  collectivist  economy. 

But  it  has  by  different  later  writers  ^-  been  made  clear 
that  cessation  of  labor  is  something  more  than  surcease  of 
the  sorrows  of  working — that  leisure  has  a  positive  quality, 
in  the  recreation  that  it  offers  and  in  the  opportunity  that  it 
presents  of  enjoyment  through  the  consumption  of  those 
goods  to  which  labor  has  created  the  right.  Thus,  the 
eight-hour  day  with  its  possibly  lower  wage  will  reckon,  as 
part  offset  against  this  possible  loss,  an  added  two  hours  of 
leisure.  So  the  artist  may  have  enjoyed  every  hour  of  his 
productive  activity,  and  may  leave  it,  not  at  the  behest  of 
health  or  eyesight,  but  at  the  call  of  some  greater  alterna- 
tive pleasure  awaiting  him.  The  choice,  indeed,  for  many 
workers  is — and  for  all  workers  conceivably  might  be — a 

^  Notably  by  Patten,  Clark,  and  MacFarlane. 


CAIRNES  83 

choice  between  pleasant  productive  activity,  on  the  one  hand, 
and  pleasant  leisure  on  the  other ;  and  even  at  the  margin, 
therefore — for  even  the  labor-cost  doctrine  will  have  to 
adopt  the  marginal  analysis — there  is  no  necessity  of  pain 
cost. 

That  is  to  say,  the  positive  aspect  of  leisure,  in  its 
significance  for  the  cessation  of  commodity  productivity, 
serves  merely  to  lead  us  to  a  newly  discovered  application 
of  the  principle  of  opportunity  cost.  But,  in  truth,  a  new 
difficulty  here  presents  itself,  though  a  difficulty  with  which 
the  present  argument  has  no  concern :  Is  not  recreation  to 
be  regarded  as,  in  the  personal  estimate  and  reckoning,  an 
alternative  method  of  utility  production?  Is  not  play  pro- 
ductive? And  where  is  the  true  line  of  distinction  between 
work  and  play?     (See  chap,  xxvi.) 


CHAPTER  VII 
FURTHER   COST   DOCTRINES 

Labor  cost  in  non-competitive  production.  Opportunity 
cost. — Attention  will  later  be  directed  to  the  fact  that,  for 
the  analysis  of  exchange  value,  there  is  obvious  danger 
in  the  identification  of  desire  with  market  demand:  only 
when  purchasing  power  attends  desire  can  economic  demand 
be  said  to  exist.  But  pushed  back  into  the  field  of  produc- 
tion the  difficulty  vanishes ;  here  desire  and  demand  are 
one,  since  the  problem  is  merely  what  shall  be  produced; 
the  ability  to  produce  attends  the  desire  for  product.  True, 
the  disposition  to  produce  may  be  wanting;  but  if  so,  the 
case  is  one  which  for  present  purposes  requires  no  consid- 
eration. All  this  is  corollary  to  the  fundamental  principle 
of  economic  science,  that  for  questions  of  production,  need 
and  desire  are  fundamental,  control  supply  and  direct  it. 

Not  merely  this,  but,  in  the  isolated  economy,  produc- 
tion includes  within  itself  the  essential  phenomena  of 
exchange.  Inasmuch  as  not  all  the  things  desired  can  be 
had  in  the  quantity  desired,  there  must  be  a  choice  between 
the  things  to  be  had  and  the  things  to  be  postponed  or  fore- 
gone. Each  product  costs  some  other,  and  the  sequence  of 
production  follows  item  by  item  the  course  of  the  demand- 
desire  curve. 

Interpreted  thus — in  the  sense  of  sacrificed  opportunity 
— the  labor-pain  cost  doctrine  of  value,  as  applied  to  an 
isolated  economy,  and  applied  upon  the  assumption  that 
land  and  other  instruments  are  non-existent  or  of  incon- 
siderable influence,  is  not  very  seriously  wide  of  the  tiuth. 
Whatever  differences  in  utility  may  possibly  exist  between 
two  products  attainable  by  the  same  quantity  of  labor,  the 
more  useful  can  have  a  power  of  displacement — of  exchange 
against  another — only  upon  the  basis  of  the  equality  pre- 
scribed by  the  similar  labor  costs.     Marginal  production, 

84 


FURTHER  COST  DOCTRINES  85 

in  the  sense  of  the  point  of  cessation  from  work,  is  reached, 
when,  in  each  Hne  of  product,  more  product  will  possess 
utility  not  greater  than  the  disutility  attending  the  further 
production  of  it,  whether  the  disutility  take  the  form  of 
pain,  or  of  pleasure  displacement,  or  of  both.  And  thus, 
while  the  value  determinant  may  conceivably  be  found  in 
the  utility  quantum  of  the  marginal  product  instead  of  in 
its  pain  price,  it  is  still  true  that  this  marginal  quantum  can 
equally  well  be  expressed,  in  point  of  significance,  in  either 
of  the  two  ways:  (i)  as  a  quantity  of  utility  enjoyed — 
the  hither  side  of  the  cessation  margin,  or  (2)  as  a  quantity 
of  advantage  foregone — the  further  side  of  the  margin, 
since  the  two  quantities  are,  by  the  terms  of  the  analysis, 
equal.  And  so,  while  the  utility  of  Crusoe's  marginal  prod- 
uct could  not  be  stated  in  terms  purely  of  pain — unless, 
indeed,  Friday  were  altogether  a  tiresome  companion,  the 
island  a  savorless  island,  and  Crusoe  himself  vacant  of 
resources  for  self-amusement — the  utility  could  always  be 
stated  in  terms  of  marginal  disadvantage,  which  marginal 
disadvantage  would  serve  equally  well  with  marginal  utility 
as  the  value  measure  and  common  denominator  of  the 
derived  value  relations. 

But  it  is  important  to  remark  that  this  equation  between 
the  importance  of  the  product  and  the  importance  of  the 
items  of  resistance — whether  of  disutility  or  of  foregone 
utility  or  of  both — could  convey  to  no  second  person  any 
information  as  to  the  absolute  nature  or  volume  or  quality 
of  the  opposing  and  balancing  items,  but  would  speak  only 
of  the  relation  between  them.  The  value  of  the  ratio  at  the 
margin  could  be  asserted  as  unity,  but  nothing  could  be 
implied  or  inferred  as  to  the  importance  of  the  terms  in  the 
ratio.  And  evidently  with  different  producers,  no  basis  of 
comparison  could  be  found  either  for  the  utility  of  the 
respective  products,  or  for  the  burdensomeness  of  the 
respective  efforts,  or  for  the  attractiveness  of  the  recrea- 
tions respectively  foregone.  Abandonment  of  production 
might,    for  one   person,   be   consistent   with   great   signifi- 


86  VALUE  AND  DISTRIBUTION 

cance  of  product  as  against  great  aversion  to  labor  or 
great  disposition  toward  recreation,  while  with  a  second 
person,  the  same  hours  of  work  and  the  same  commodity 
output  might  obtain,  consistently  with  small  pains  of  labor, 
low  appraisal  of  product,  and  with  little  or  no  interest  in 
the  alternatives  of  pleasure.  Only  the  ratio  between  the 
two  opposing  quantities  can  be  inferred,  which  ratio  is 
always  to  be  expressed  as,  at  the  margin,  one  of  equality, 
whether  the  opposing  quantities  are  5  :  5  or  2  :  2  or  ^  :  3^. 
And,  in  fact,  not  even  as  much  as  this  may  seem  to 
imply,  is  legitimately  to  be  inferred.  The  principle  of 
homogeneity,  precisely  as  it  is  inapplicable  to  the  individ- 
ual's entire  day's  activity,  and  is  serviceable  only  as  a 
day's-end  margin  and  measure,  fails  as  a  method  of  com- 
parison over  intervals  of  time.  That  is  to  say,  Crusoe  on 
different  days  is,  for  the  purposes  of  the  present  analysis, 
so  many  different  men,  with  different  levels  of  zeal,  vigor, 
capacity  for  pleasure,  and  sensitiveness  to  pain.  Nothing 
but  the  equality  of  ratios  holds. 

Collectivist  production  would,  for  the  most  part,  pro- 
ceed parallel-wise  with  production  in  the  isolated 
individual  economy.  Production  would  of  necessity  accommo- 
date itself  to  the  principle  of  diminishing  item  utility  with 
increasing  product,  and  of  increasing  resistance  to  produc- 
tive effort  with  lengthening  hours  of  labor;  the  day's-end 
margin  of  cessation  would  be  fixed  where  the  group  aver- 
age and  aggregate  of  utility  from  added  effort  should 
appear  to  be  at  balance  against  the  effort  pain  and  recrea- 
tion loss  incident  to  further  production. 

But  here  again,  not  all  the  product  obtained,  and  con- 
ceivably none  of  it,  would  be  at  the  cost  of  pain.  In  a  loose 
group  way,  by  an  estimate  of  some  sort,  a  margin  of  effort 
would  be  established  at  which  the  desire  for  more  product 
should  be  equated  against  the  resistance  to  further  pro- 
duction ;  but  this  resistance  would  be  in  part,  and  might 
be  in  its  entirety,  the  expression  of  the  pull  of  recreation 


FURTHER  COST  DOCTRINES  87 

utility;  that  is  to  say,  the  retirement  margin  would  rarely,  if 
ever,  be  entirely  a  weariness  margin,  and  might  be  in  no 
measure  due  to  weariness. 

Thus,  interpreted  broadly  enough  to  include  not  merely 
labor  pain  but  also — if  the  case  is  of  the  sort  so  to  require 
— all  labor  sacrifice  reckoned  in  terms  of  displacement, 
whether  of  pleasure  or  of  product  or  of  both, — a  value 
determinant,  or  at  all  events,  a  value  denominator  in  terms 
of  cost  may  be  found,  either  for  the  isolated  or  for  the 
collectivist  economy,  if  and  when  the  problem  can  be  taken 
as  presented  clear  of  instrument  complications ;  but  equally 
clearly,  the  denominator  may  also  be  stated  in  terms  of  the 
utility  product  against  which  the  cost  stands  equated  as  the 
purchase  price.^ 

Opportunity  cost  and  outlay  cost  in  competitive  produc- 
tion.— In  no  case  can  the  pains  or  the  pleasures  of  produc- 
tion have  significance  for  market  value  otherwise  than  as 
they  bear  upon  supply — that  is,  upon  the  relative  volumes 
of  goods  seeking  exchange  against  one  another.  All  market- 

^  But  the  labor-cost  margin — in  no  matter  what  ameliorated  sense — 
will  not,  as  the  only  margin  or  as  the  margin  of  chief  significance,  apply 
where  allowance  must  be  made  for  the  presence  of  productive  instru- 
ments. 

With  land  instruments  and  capital  instruments,  the  problem  is 
evidently  not  one  of  pain,  but  of  displacement.  It  is  even  questionable 
whether  the  weariness  margin  is— even  for  the  independent  producer — 
comparable  in  degree  of  significance  with  the  margin  of  choice  between 
industries.  Occupations  are  chosen  each  as  an  aggregate  and  total  and 
for  long  periods,  and  mostly  by  comparison  of  the  totals  of  value 
return.  And  during  all  the  day,  up  to  the  marginal  effort,  the  labor 
product  is  affording  a  differential  above  its  pain  cost ;  but  the  aggre- 
gate magnitude  of  these  quasi-rent  quantities  differs  with  different 
employments,  and  renders  any  comparison  between  industries  possible 
only  as  employment  units  and  totals :  the  problem,  then,  even  were  no 
instrument  complications  involved,  could  never  present  itself  in  terms 
of  pain,  but  only — if  a  labor-unit  or  labor-item  question  of  any  sort — 
as  a  question  of  how  most  advantageously  to  apply  the  total  labor  outlay 
in  view  of  the  aggregate  results. 

Nor  even  at  the  margin  can  the  cessation  problem  with  the  inde- 
pendent farmer  be  one  solely  of  weariness  against  product :  if  there  is 
no  question  of  the  hired  men,  their  wages  and  their  acquiesence,  there 
are,  in  any  event,  to  be  considered  the  comfort  and  welfare  of  the 
work-animals. 

No  issue  is  intended  to  be  offered  here  as  to  the  right  of  pain  to 
stand  as  one  among  the  many  different  cost  considerations  to  be  over- 


88  VALUE  AND  DISTRIBUTION 

cost  doctrines  are  supply  doctrines,  and  explain  value  only 
in  the  sense  and  to  the  degree  that  supply  explains  value — 
that  is,  only  upon  the  assumption  that  demand  may,  for  the 
purposes  of  the  case,  be  taken  for  granted. 

Taking  as  accepted  this  principle  that,  under  the  cost 
problem,  we  are  set  to  investigate  exclusively  those  influ- 
ences bearing  upon  supply  to  limit  it,  certain  typical  doc- 
trines of  cost,  and  of  the  relations  of  cost  to  price,  await 
examination. 

Let  it  be  assumed  that  a  manufacturer  of  hats  faces  the 
following  situation :  per  unit  of  product  he  expends  $i  for 
wages  and  50  cents  for  raw  materials ;  the  capital  employed 
in  producing  a  hat  would  elsewhere  earn  him  15  cents;  as 
employee  in  someone's  else  service,  he  could  earn  15  cents 
for  each  hat  now  produced;  transferring  himself  and  his 
productive  equipment  to  the  shoe  industry,  he  could  obtain 
a  product  of  $1.85  in  place  of  each  hat  now  produced;  he 
sells  his  hats  at  $2  each :  What  is  his  cost  of  production 
and  what  his  profit  per  hat? 

According  to  the  older  reasoning  and  the  older  termi- 
nology, the  50  cents  accruing  to  the  employer,  after  the 
$1  in  wages  and  the  50  cents  in  materials  were  covered, 

born  by  the  remunerations  in  prospect.  Our  wheat-producing  farmer, 
as  we  shall  later  more  fully  see,  presents  at  the  same  time  many  differ- 
ent supply  margins  ;  e.  g.,  a  rent-outlay  margin,  a  wage-outlay  margin,  an 
indefinite  number  of  seed,  fertilizer,  and  implement  margins,  a  corn- 
displacement  margin  for  some  portions  of  his  product,  a  bean-displace- 
ment margin  for  other  portions,  capital-wear  and  land-wear  margins 
for  some  acres  of  his  crop,  and,  among  all  the  others,  pity  margins  for 
his  draft  cattle,  his  wife,  and  his  children,  a  mixed  decency-and-expedi- 
ency  margin  for  his  employees,  and,  finally,  a  weariness  margin  for 
himself.  And  all  these  margins  may  be  effective  at  the  same  time  to 
set  a  limit,  in  different  places  and  directions,  to  his  production,  and 
might  conceivably  converge  in  influence  to  dictate  the  non-production 
of  any  particular  line  of  product,  or  of  any  particular  item  of  that  par- 
ticular line.  And  at  different  price  levels  for  products,  and  with 
different  producers,  new  and  different  combinations  of  margins  would 
be  presented  ;  different  supply  volumes  have  different  supply  prices. 

And  among  all  these  different  margins,  no  one  seems  to  be  more 
distinctly  supply  or  price  determining  than  any  other,  excepting  in 
degree  of  influence ;  and  in  fact  no  one  of  them  appears,  from  the 
individual  producer's  point  of  view,  quite  so  emphatically  price-deter- 
mining as  price-determined :  but  more  of  this  later. 


FURTHER  COST  DOCTRINES  89 

would  be  capitalist's  profit.  But  what  part,  if  any,  of  this 
profit  should  be  reckoned  within  cost  of  production? 

Keeping  closely  in  touch  with  the  habit  of  thought  of 
business  men,  Hadley  would,  as  the  present  writer  under- 
stands him,  regard  profit  as  that  which  remains  over  and 
above  cost  of  production,  and  would  confine  the  cost  reckon- 
ing to  outlays.^  There  is  room  for  question  as  to  the  15 
cents  for  interest:  if  this  were  paid  for  borrowed  capital, 
the  cost  would  certainly,  in  Hadley's  view,  be  $1.65,  and 
the  profit  35  cents;  perhaps  it  should  be  inferred  that  the 
same  result  would  present  itself  were  the  capital  that  of  the 
manufacturer  himself. 

It  appears,  also,  to  have  no  bearing  upon  the  present 
problem  that  interest  outlays  are,  in  Hadley's  thinking,  to 
be  regarded  as  mere  wages  of  past  labor  and  to  be  ranked 
under  the  general  head  of  wage  payments. 

Recurring,  however,  again  to  the  principle  that  cost, 
for  the  purposes  of  economics,  whatever  may  be  the 
preferable  view  for  purposes  of  bookkeeping,  is  important 
only  as  the  master-key  to  the  supply  problem — that  our 
quest  is  the  determination  of  what  the  French  call  the  prix 
de  revient — it  becomes  evident  that  $1.50  or  $1.65  bears  not 
the  slightest  relation  to  cost  when  conceived  as  the  point 

^  "The  excess  of  return  above  cost  is  known  as  profit.  The  profit 
of  an  individual  is  the  difference  between  money  advanced  in  produc- 
tion  and   money   received    from   the   sale   of  the   product Profits 

are  neither  more  nor  less  than  the  excess  of  the  selling  price  of  the 
products  of  industry  above  the  money  advanced  as  wages.  It  is  true 
that  some  of  the  investments  of  an  individual  capitalist  are  not  made 
in  the  form  of  wages,  but  in  payments  for  materials  and  machinery 
which  other  capitalists  have  made  ready  for  use.  But  if  we  look  at  the 
relation  between  capitalists  as  a  class  and  laborers  as  a  class,  we 
shall  find  that  the  capitalists  as  a  body  advance  wages,  and  appro- 
priate the  difference  between  the  price  paid  to  the  laborers  and  that 
received  from  the  customers." — Arthur  Twining  Hadley,  Economics, 
p.    124. 

This  appears  to  leave  the  question  of  interest  in  about  the  condi- 
tion that  James  Mill  left  it ;  but  the  problem  in  hand  is  another  prob- 
lem ;  were  it  true,  however,  that  our  present  concern  led  us  in  the 
direction  of  interest  theory,  it  would  be  worth  while  to  point  out  that 
Hadley's  definition  of  interest  as  commuted  profits  is  open  to  this  same 
line  of  criticism — that  it  leaves  the  time-discount  aspect  of  interest 
inadequately  accounted  for. — Ibid,,  p.  270. 


90  VALUE  AND  DISTRIBUTION 

below  which  the  producer  under  consideration  will  decline 
to  produce;  he  could  do  better  than  $1.65  as  wage-earner 
and  better  yet  in  shoe  production. 

Mill's  view,  while  confused  in  terminology  and  not 
fully  consistent  in  reasoning,  approaches  more  nearly  to  a 
formulation  of  the  influences  affecting  the  producer's  choice 
between  his  different  industrial  openings.  Profit  is  dis- 
tributed by  Mill  into  interest,  wages  of  superintendence, 
and  compensation  for  risk.  It  is  true  that  in  one  chapter 
Mill  speaks  of  profit  as  the  excess  of  receipts  over  cost  of 
production,^  while,  in  another  place,  he  treats  minimum 
profit  as  a  part  of  necessary  price,*  but  as  this  necessary 
price  is  the  money  magnitude  for  which  we  are  seeking, 
and  as,  in  the  general  trend  of  his  doctrine,  Mill  identifies 
cost  of  production  with  necessary  price,  it  is  in  the  spirit 
of  his  doctrine  to  regard  minimum  profit  as  a  constituent 
part  of  cost  of  production.  It  is  in  this  sense  that  we  are  to 
interpret  his  statement  that  the  necessary  price  must  be  an 
amount  sufficient  to  cover  cost  and  the  ordinary  expectation 
of  profit.  Nothing  very  satisfactory  is  offered  as  to  the 
quantum  of  this  ordinary  profit:  In  one  place  a  subsist- 
ence-minimum determinant  is  suggested  for  capitalists : 
"They  will  not  even  go  on  producing  at  a  profit  less  than 
they  can  live  upon."  ^  But  not  much  is  made  of  this  view. 
In  general,  the  doctrine  runs : 

The  cost  of  production,  together  with  the  ordinary  profit,  may 
be  called  the  necessary  price  or  value  of  all  things  made  by  labor 
and  capital.*  ....  The  latent  influence  by  which  the  values  of 
things  are  made  to  conform  to  cost  of  production  is  the  variation 
that  would  otherwise  take  place  in  the  supply  of  the  commodity.^ 

That  is  to  say.  Mill  divides  profit  into  the  two  parts, 
one,  a  minimum  or  necessary  profit,  the  other,  a  surplus 

^Principles,   Book  III,  chap,  iii,  sec.  i. 
*  Ibid.,   Book  II,  chap,  xv,  sec.  2. 
^  Ibid.,   Book  III,  chap,  iii,  sec.  i. 
^  Ibid.,   Book  III,  chap,  iii,  sec.  i. 
'  Ibid.,  Book  III,  chap,  iii,  sec.  2. 


FURTHER  COST  DOCTRINES  9^ 

over  this  necessary  minimum.  Some  part,  therefore,  of  the 
35  cents  left  over  after  outlays  and  interest  have  been  cov- 
ered, is  included  within  the  necessary  price,  the  true  cost, — 
enough  to  allow  to  the  entrepreneur  the  ordinary  rate  of 
profit.  Here,  it  may  be  noted,  is  a  distinct  foreshadowing 
of  the  concept  of  producer's  quasi-rent.  But  Mill  makes 
nothing  further  of  it. 

Walker,  on  the  contrary,  regards  these  producers'  dif- 
ferentials as  of  controlling  importance  in  the  problem  of 
necessary  price.  Marginal  cost  of  production  is  taken  as 
the  determinant  of  price,  and  precisely  as  land  rent  is  con- 
ceived as  a  surplus  over  and  above  cost — a  price-determined 
distributive  share  and  not  a  cost — so  producers'  differen- 
tials are  computed  as  surpluses  above  the  price-determining 
margin  of  production  and  as  such  are  made  irrelevant  to 
price  fixation.  For,  in  order  to  find  the  price  point  with 
manufactured  goods,  we  must,  it  is  said,  find  the  marginal 
producer's  cost,  just  as  with  agricultural  products  we  are 
supposed  to  find  the  cost  upon  marginal  land — a  point  at 
which  there  is  no  differential  to  be  computed. * 

Entrepreneurs  are  evidently  of  differing  capacities,  pre- 
cisely as  lands  are  of  different  grades  of  fertility ;  thus,  to 
find  the  cost-determining  production,  we  must,  it  is  said, 
find  the  marginal  entrepreneur,  the  lowest  paid  among  all 
those  producers  who  can  afford  to  remain  in  production. 
Whatever  the  more  skilful  entrepreneurs  get  above  this  mar- 
gin is  unnecessary,  or  diff'erential,  or  surplus  profit,  or  pro- 
ducers' quasi-rent,  accordingly  as  one's  choice  of  terms 
may  dictate. 

And  thus — returning  to  our  hat  manufacturer  and  his 
cost  problem — it  would  seem  that,  in  Walker's  view,  we 
have  not  yet  sufficient  data,  either  for  determining  the  cost 
in  the  sense  of  the  profit  necessary  to  keep  the  manufac- 
ture in  the  business  of  production,  or  for  measuring  his 
surplus,  his  differential  gain ;  we  must,  it  seems,  first  know 

*  Walker,  Advanced  Course,  sees,   1 19-143,   297-299. 


92  VALUE  AND  DISTRIBUTION 

how  much  his  less  skilful  competitor  is  making,  before  we 
can  fix  upon  the  lowest  price  at  which  he  himself  will  con- 
tinue to  produce. 

But  according  to  the  principle  of  opportunity  cost,  the 
best  alternative  open  to  our  hat-producer  is  not  to  lend  out 
his  capital  and  to  accept  a  salaried  position ;  this  would  give 
him  but  30  cents  as  his  total  of  interest  and  personal 
remuneration,  whereas  in  the  shoe  industry  his  unit  of 
product  would  have  a  market  value  of  $1.85,  permitting 
35  cents  of  return  to  himself  and  his  capital  holdings — that 
is,  20  cents  for  his  personal  remuneration.  In  the  hat 
industry,  however,  he  is  getting  $2  of  market  product ;  his 
return  in  the  hat  industry  may  fall  to  the  $1.85  limit  before 
he  will  decide  to  change  from  hat  to  shoe  production.  And 
it  is  evidently  beside  the  point  to  urge  that  his  least  skilful 
competitor  is  deriving,  from  this  market  price  of  $2,  only — 
say — 10  cents  of  personal  remuneration.  This  fact,  clearly, 
gives  no  basis  for  arriving  at  the  first  man's  occupation 
differential.  Nor,  more  important  still,  does  it  necessarily 
imply  that  the  second  man  is  the  man  upon  the  margin  of 
withdrawal  or  nearest  to  it.  If,  getting  in  the  hat  business 
only  10  cents  of  personal  remuneration,  his  best  alternative 
were  yet  one  cent  in  shoes,  he  would  still  be  nine  price 
points  distant  from  withdrawal,  whereas  another  man  of 
very  considerably  higher  absolute  profit  might  be  fewer 
points  distant.  It  is,  in  truth,  entirely  credible  that  the 
largest  profit-maker  in  the  industry  should  be  the  marginal 
producer  in  that  industry.  All  producers'  cost  differentials 
are  reckoned  from  this  alternative  basis,  as  quantities  deriva- 
tive from  the  opportunity-cost  margin. 

Obviously,  only  the  most  general  notions  and  the  simplest 
of  the  applications  of  opportunity  cost  can  be  presented  at 
this  time.  One  caution,  however,  appears  to  be  immediately 
called  for;  the  doctrine  of  opportunity  cost,  rightly  under- 
stood, does  not  point  fundamentally  to  the  question  of  how 
much  could  be  realized  of  gain  in  some  alternative  occupa- 


FURTHER  COST  DOCTRINES  93 

tion  or  activity,  but  only  to  how  much  must  be  realized  in 
the  occupation  or  activity  under  consideration  in  order  to 
insure  its  continuance.  Opportunity  considerations,  alter- 
natives, are  mere  data,  among  others,  in  the  computation, 
and  may  or  may  not  be  controlling — that  is  to  say,  questions 
of  taste,  of  health,  of  reputability,  of  strain  or  severity  of 
requirement,  all  may  be  important  factors  in  the  choice. 
Again,  the  choice  may  not  lie  between  two  gainful  occupa- 
tions, but  between  some  one  gainful  occupation  and 
idleness.  In  short,  each  man's  cost  is  simply  his 
prix  de  revient,  the  price  requirement  upon  which  the  con- 
tinuance of  production  by  him  depends.  And  evidently  his 
price  may  differ  for  differing  volumes  of  product.^ 

"  The  relations  of  opportunity  cost  to  price,  as  presented  by  several 
of  the  later  writers,  will  best  be  examined  in  connection  with  the  concept 
of  profit — and  its  relation  to  cost ;  see  note  at  close  of  the  next  chapter. 

So  far  as  the  present  writer  is  informed,  David  I.  Greene  is 
entitled  to  the  credit  of  first  having  given  adequate  formulation  to  this 
doctrine  of  opportunity  cost — see  an  article  published  by  him  in  the 
January  (1894)  number  of  the  Quarterly  Journal  of  Economics.  With- 
out acknowledgment  of  this  contribution,  and,  indeed,  in  entire  igno- 
rance of  it,  an  article  covering  very  much  the  same  ground  was,  by  the 
present  writer,  published  in  the  September  (1894)  number  of  the 
Journal  of  Political  Economy,  under  the  title  of  "The  Formula  of 
Sacrifice;"  see  also,  by  the  present  writer,  the  May  (1902)  number  of 
the  Quarterly  Journal  of  Economics,  "Proposed  Modifications  in  Aus- 
trian Theory  and  Terminology;"  and  the  November  (1905)  Yale 
Review,   "Doctrinal  Tendencies — Fetter,   Flux,   Seager  and   Carver." 


CHAPTER  VIII 

PROFIT  DEFINED:    PROFIT  AND  RISK  AS  RELATED  TO 

COST 

Risk  profit. — Mill's  formulation  that  necessary  price 
must  cover,  among  other  things,  compensation  for  risk,  is 
incontestable  for  all  cases  where  risk  is  really  a  fact  of  cost ; 
but  when,  if  ever,  is  this  the  case?  Is  it,  indeed,  clear  that 
it  is  ever  the  case?  And  where,  then,  is  the  room  for  risk 
profit  ? 

If  the  risk  compensation  is  only  sufficient  to  cover  the 
risk,  there  is  no  room  for  profit.  The  unharvested  crops 
form,  in  the  long  run,  part  of  the  cost  of  the  harvested.  So 
the  bad  debts  of  the  merchant  are  a  part  of  the  cost  of  get- 
ting goods  into  the  hands  of  the  paying  customer.  Here 
is  evidently  a  class  of  risks  that  are  to  be  included  within 
production  costs ;  and  the  compensation,  being  the  correla- 
tive of  a  risk  assumed  and  not  a  reward  of  personal  skill 
or  effort,  is,  by  this  very  fact,  not  a  part  of  profit.  It  is 
only  when  the  risk  remuneration  is  more  than  the  risk 
burden  that  profit  can  be  derived  from  taking  risk. 

And  in  some  cases,  doubtless,  profits  of  this  sort  are 
obtained,  as  with  insurance  contracts  typically,  and  with 
well-organized  businesses  in  the  speculative  markets.  But 
what  shall  be  said  of  the  risk  to  which  the  wholesaler  is 
submitted  when  he  buys  his  supplies,  that  prices  may  fall, 
or  of  his  hope  that  prices  will  rise?  Is  the  gain,  if  gain 
befalls,  more  than  compensation  for  the  risk,  or  is  the  loss 
other  than  the  equivalent  of  the  gain  which  was  equally  in 
prospect  when  the  purchase  was  made? 

In  point  of  fact,  analysis  of  risk  must  distinguish  two 
cases,  ( I )  where  the  danger  of  loss  has  no  correlative  of 
gain,  and  where,  therefore,  the  question  is  solely  as  to  who 
shall  carry  the  hazard, — cases  which  easily  lend  themselves 
to  the  business  of  making  profit  off  the  carrying  of  risk; 

94 


PROFIT  DEFINED  95 

(2)  where  profit  and  loss  are  equally  in  prospect,  or  are 
somehow  in  the  market  equated  against  each  other. 

It  is  probable  that  in  this  second  case,  utility  falling  per 
item  with  increased  supplies  of  goods,  the  chance  of  gain 
must,  as  a  computation  in  terms  of  dollars,  outweigh  the 
appraised  money  equivalent  of  the  chance  of  loss,  else  the 
falling  utility  attaching  to  each  dollar  would  leave  the 
balance  slightly  one  of  loss  in  the  individual  utility  schedule. 

But  it  is  only  in  cases  falling  under  the  first  class  that 
risk  is  properly  to  be  reckoned  as  appreciably  an  item  of 
cost. 

Risk  interest. — The  relations  of  risk  to  interest  and  of 
risk  interest  to  profit  are  perhaps  not  more  intricate  in 
theory,  but  are  even  more  disastrously  confused  in  tradi- 
tional economic  discussion.  Viewed  as  the  reward  of  absti- 
nence, interest  cannot  include  the  risk  share  in  the  amount 
received.  Viewed  as  any  sort  of  compensation  to  the 
owner  for  investment  opportunity  foregone,  risk  must  be 
excluded.  And  as  the  difference  between  the  present  value 
of  goods  and  their  future  value,  interest  cannot  cover  risk; 
only  as  the  difference  between  a  certain  present  value  and  a  j 
contingent  future  value  could  the  risk  charge  be  included  in,^ 
interest.  Adopt,  however,  the  standpoint  not  of  the  lender 
but  of  the  borrower,  and  the  question  takes  on  another 
aspect.  Dishonest  borrowing  aside,  interest  becomes  a  pay- 
ment for  the  use  of  wealth,  or,  more  accurately,  a  payment 
for  the  difference  in  desirability,  to  the  borrower  under 
consideration,  of  present  over  future  goods — or,  more 
accurately  still,  of  present  over  future  purchasing  power  as 
reckoned  in  the  prevailing  standard.  For  the  marginal 
borrower  the  interest  is  the  approximate  equivalent  of  this 
difference. 

That  is  to  say,  the  risk  payment  is  received  by  the  lender 
in  one  character  and  is  paid  by  the  borrower  in  another. 
It  advantages  the  marginal  lender  nothing  or  nearly  noth- 
ing; the  risk  fact  may,  in  truth,  diminish  his  net  or  pure 


96  VALUE  AND  DISTRIBUTION 

interest,  by  its  effect  to  retire  some  part  of  the  total  demand ; 
it  burdens  the  borrower  as  a  cost;  it  is  Hke  a  tax  imposed 
on  the  loan  relation. 

To  whom,  then,  goes  the  gain  to  correspond  with  the 
aggregate  of  loss  to  borrowers  and  lenders?  It  does  not 
necessarily  follow  that  the  entire  benefit  of  this  intermediate 
quantity — this  tax — accrues  to  defaulting  borrowers. 
There  is  room  for  lenders'  quasi-rents  in  the  relation, — 
that  is  to  say,  there  may  be,  in  favor  of  the  non-marginal 
lenders,  differentials  between  what  it  really  costs  to  carry 
the  risk  and  the  compensation  which  the  market  premium 
upon  risk  allows.^  And  this  is  the  only  case  of  true  risk 
profit  in  the  interest  relation;  subject  to  this  modification, 
the  premium  is  the  precise  equivalent  of  the  loss  danger 
accepted. 

But  it  remains  to  ask  what  name  shall  be  given  to  this 
equivalent.  It  is  commonly  regarded  as  a  portion  of  profit ; 
but  as  it  is  evidently  not  remuneration  for  the  personal  fac- 
tor in  production  or  in  business  activity  of  any  sort — not 
pay,  that  is,  for  labor  of  superintendence  or  for  any  other 
form  of  effort,  but  only  compensation  for  the  danger 
incurred  of  failing  to  get  compensation — there  is  force  in 
the  view  that  the  special  category  of  risk  profit  should  be 
recognized.  The  objection  to  this  is  that,  just  as  when  one 
lends  his  capital  he  charges  something  extra  for  risk,  and 
calls  it  interest  or  risk  interest,  so  when  he  puts  his  own 
capital  at  risk  in  his  own  business,  he  should,  it  would  seem, 
reckon  his  risk  gain  as  compensation  for  the  hazardous 
capital  use — another  form  of  risk  interest.  The  losses  of  an 
enterprise  must  ordinarily  be  paid  out  of  the  operator's 
wealth.  Profit-makers  pay  losses,  when  losses  come,  in  the 
capacity  of  wealth-owners  and  not  of  mere  operators. 

But  it  has  still  to  be  recognized  that  the  thing  at  hazard 
is  not  necessarily  and  solely  the  capital  invested.  The 
operator  may,  indeed,  be  investing  nothing  but  his  time  and 
effort;  or  his  hazard  may  be  such  as  not  to  extend  farther 

^  Cf.  Carver,  Quarterly  Journal  of  Economics,  March,   1891. 


PROFIT  DEFINED  97 

than  the  vakie  of  the  time  and  effort  devoted  by  him  to  the 
enterprise. 

There  is,  then,  room  for  a  concept  of  risk  wage;  and 
for  this  there  could  be  no  vaHd  objection  to  the  term  risk 
profit,  were  the  term  profit  not  already  overweighted  in 
point  of  duties  and  overclouded  with  accumulated  ambigui- 
ties. 

The  question,  then,  whether  there  is  any  place  for  the 
term  risk  profit  is  to  be  decided  by  the  meaning  intended  to 
be  attached  to  the  term  profit  itself;  and  in  regard  to  the 
precise  meaning  of  this  term  there  exists  lamentable  uncer- 
tainty. There  is,  however,  a  general  consensus  of  opinion 
for  the  exclusion  of  interest  from  the  concept ;  and  some 
disposition  must  be  recognized  toward  the  exclusion  of 
wages  of  superintendence;  and  if  the  foregoing  analysis  of 
risk  be  accepted,  there  is  small  justification  for  continuing 
to  include  anything  commonly  indicated  under  the  term  risk 
profit;  and  for  whatever  need  really  exists  the  term  risk 
profit  and  not  profit  recommends  itself. 

Risk  interest  should  be  extended  to  cover  not  merely 
the  hazard  compensation  of  actual  lenders  but  also  the 
hazard  compensation  of  him  who  adventures  his  own 
resources  under  his  own  management.^ 

The  question  remains  whether  the  term  profit  shall  serve 
(i)  merely  for  exceptional,  unclassified,  lawless  gains — 
conjuueture  profits  as  they  have  sometimes  been  called,  or 
whether,  on  the  contrary,  the  term  should  stand  (2)  for  the 
broader  notion  of  compensation  for  the  independently  work- 
ing human  factor  /;/  production,  or  (3)  for  the  still  broader 
notion  of  compensation  for  the  independently  gain-acquir- 
ing human  factor  in  economic  activity. 

For  it  must  be  noted  that  here  as  elsewhere  there  is 
danger  of  confusing  the  technological  and  socially  produc- 

^  Cf.  Veblen,  Theory  of  Business  Enterprise,  pp.  120-30,  as  to  the 
difficulty  of  finding  a  time  unit  for  the  hazards  and  gains  of  high 
finance. 


98  VALUE  AND  DISTRIBUTION 

tive  aspects  of  business  with  the  competitive  and  gain- 
making  aspects.  Number  (2)  would  conceive  profits  as 
compensation  for  independent  productive  activity,  and 
would  thus  make  no  place  for  a  large  part  of  what  fall 
under  the  general  head  of  conjuncture  gains,  but  would 
stand,  rather,  as  an  opposed  and  alternative  notion.  Num- 
ber (3),  the  competitive  view,  would  harmonize  (i)  and 
(2)  by  including  them. 

It  has  been  the  writer's  preference  to  use  the  term 
profit  in  this  third  sense,  as  denoting,  that  is,  the  residual 
compensation  falling  to  independent  business  activity  after 
such  apportionment  as  is  possible  has  been  made  for  rent, 
interest,  wages,  and  other  outlays.  In  this  sense,  profit 
stands  as  merely  one  form  of  the  remuneration  of  labor  and 
is  thereby  a  subhead  under  the  broader  interpretation  of  the 
term  wages."  It  points  to  gain  without  the  intervention 
of  an  employer ;  it  is,  then,  remuneration  to  the  entrepre- 
neur for  entrepreneur  activity  as  such.  This  profit  goes, 
truly,  to  him  who  takes  the  risk,  but  does  not,  therefore,  go 
as  compensation  for  the  risk  or  in  proportion  to  it.* 

'  For  wages,  it  should  be  remembered,  are  not  derivative  solely 
from  technological  or  other  productive  activity.  I  may  pay  my  wage- 
earner  to  destroy  your  property  or  to  besmirch  your  reputation. 

*The  concept  here  presented  is  believed  to  be,  in  a  general  way,  in 
harmony  with  the  later  trend  of  economic  thought.  Taking  the  recently 
published  works  of  Professors  Carver,  Fetter,  Flux,  Seager,  and  Seligman, 
as  representative  in  this  regard,  it  will  be  profitable  to  glance  at  their 
respective  usages.  Thomas  Nixon  Carver,  The  Distribution  of  Wealth, 
Macmillan,  1904;  Frank  A.  Fetter,  Tlie  Principles  of  Economics,  The 
Century  Co.,  1904  ;  A.  W.  Flux,  Economic  Principles,  Methuen  &  Co., 
1904 ;  Henry  Rogers  Seager,  Introduction  to  Economics,  Henry  Holt 
&  Co.,  1904  ;  Edwin  R.  A.  Seligman,  Principles  of  Economics,  Long- 
mans, Green  &  Co.,   1905. 

Professor  Fetter's  notion  of  profits  is  more  easily  arrived  at  than 
that  of  any  one  of  the  other  writers  under  examination  :  "Profits  are 
the    net   gain    of   the    enterpriser   after    counting    the    rent   of    material 

agents   and    contract    wages Profits   are    the    income    attributable 

to  the  enterpriser's  services Economic  profits  are  not  contract 

wages,  not  being  paid  by  agreement,  but  being  yielded  impersonally  by 
the  industry.     Profits  are,   however,   economic  wages  or  the   earnings  of 

services Profits    are    due,    not    to    risk,    but    to    superior    skill 

in  taking  risk.  They  are  ....  earned  in  the  same  sense  that  the 
wages  of  skilled  labor  are  earned." — Fetter,  The  Principles  of  Eco- 
nomics, chap,  xxxi,  passim. 

This  is  not,  one  infers,  a  denial  that  the  taking  of  risk  may  be  the 


PROFIT  DEFINED  99 

characteristic  and  distinguishing  mark  of  entrepreneurship,  but  it  is  a 
denial  that  compensation  for  risk  is  profit,  unless  in  the  measure  that 
compensation   is   more   than    the   value   and   burden   of   the    risk. 

This  falls  in  with  Professor  Carver's  view  that  the  "profits  of 
insurance  are  a  kind  of  risk-taker's  rent.  They  owe  their  existence 
to  the  fact  that  they  are  not  the  reward  of  risk-taking,  but  that  they 
are  a  surplus  over  and  above  the  real  risk  assumed.  [The  entrepre- 
neur's risk  rent]  is  due  not  to  the  risk  he  assumes,  but  to  the  risks  that 

he  does  not  assume Stated  more  accurately  ....  his  net  income 

or  profit  arises  from  the  fact  that  he  is  able  to  reduce  his  own  risk 
below  that  which  others  would  have  to  bear." — Carver,  Quarterly 
Journal  of  Economics,  May,    1901. 

Professor  Seager  defines  profits  as  "balances  left  over  from  the 
sale  of  products  after  all  of  the  expenses  of  production  have  been 
paid,"  a  production-category  concept. — Seager,  Introduction  to  Eco- 
nomics, p.  55. 

In  a  state  of  normal  equilibrium  the  competition  of  entrepreneurs 
would  bring  it  about  that  "the  profits  of  entrepreneurs  would  just  cover 
wages  of  management." — Ibid.,  p.   172. 

It  is  thus  evident  that  in  arriving  at  the  profit  remainder,  Seager 
would  conceive  of  compensation  for  one's  own  land  and  capital  as  a  form 
of  expense,  "virtually  an  expense,"  as  he  puts  it  elsewhere  ;  this  leaves 
profit  substantially  as  Fetter  conceives  it,  with  some  doubt  possible  as 
to  the  precise  relation  in  Seager's  view  between  risk  and  profit,  and, 
for  Fetter's  case,  with  some  ambiguity  as  to  whether  profit  is  a  pro- 
duction category  or  a  gain  category. 

Professor  Flux's  notion  of  profit  is  more  difficult  to  make  plain  : 
but  it  is  formulated  in  better  recognition  of  the  latter-day  forms  of 
business  organization. 

Under  entrepreneur,  that  is,  under  non-corporate  management, 
profits  are  seemingly  regarded  as  in  approximate  parallel  with  wages : 

"So  long  as  the  business  man  was  in  large  degree  owner  and 
manager    at    the    same    time,    his    remuneration    naturally    covered    the 

return  to  capital  and  to  organizing  effort The  growing  use  of 

capital    by     other     than    its     owners    required     the     separation     of    the 

remuneration  of  the  capitalist  ....  from  that  of  the  undertaker 

Later  we  have  seen  the  growth  of  a  great  system  of  joint  stock  enter- 
prise  The    replacement    of    the    independent    owner    of    business 

enterprises  by  a  salaried  manager  seems  to  suggest  a  further  analysis  of 
profit," 

But  under  the  non-corporate  form  of  organization,  "the  capable 
entrepreneur  reaps  a  reward  corresponding  to  his  superiority  over  the 

less  capable  man  with  whom  he  is  in  competition If  he  gets  the 

use  of  capital  on  better  terms,  it  is  because  of  the  lower  risk  associated 
with    his    control    than    with    that    of    the    others    who    pay    a    higher 

rate The  gains  of  the  highly  remunerated  entrepreneur   .... 

are  certainly  not  secured  by  enforcing  harder  terms  on  labor  than  labor 

secures   from   rivals Whether   the    earnings   of   employers   who 

just  maintain  themselves  as  employers  be  regarded  as  made  up  wholly 
of  wages  ....  and  in  no  degree  of  profits  ;  whether  we  call  the  whole 
of  the  earnings,  even  of  these  entrepreneurs,  profits,  the  important 
implication  of  this  view  of  the  case  will  be  substantially  the  same 


lOO  VALUE  AND  DISTRIBUTION 

[But]  the  later  organization  separates  the  remuneration  of  the  manager 

from  that  of  the  owner The  distributive  share  known  as  profits, 

then,  has  in  practice,  had  the  remuneration  of  the  services  of  manage- 
ment cut  out  of  it.  What  is  left,  profits  proper,  represents  the  share 
of  those  who  take  risks  and  assume  the  responsibility  of  directing  the 
general  lines  of  policy  which  the  manager  is  to  carry  out." — Flux, 
Economic  Principles,  chap,  x,  passim. 

Fully  worked  out,  however,  this  more  actual  treatment  would  not 
diverge,  for  theoretical  purposes,  and  for  terminology,  from  the  wage- 
view  of  profit.  Doubtless  different  forms  of  personal  activity  are 
included  within  the  function  of  ordinary  entrepreneur  managership ; 
some  of  the  these  activities  are  more  detailed  or  more  clerical  in  nature 
than  others  ;  but  in  any  case  all  are  personal  activity  and  are  remuner- 
ated as  such.  That  a  part  are  delegated — the  less  responsible  part — 
to  salaried  employees,  leaves  the  residuum  of  remuneration  none  the 
less  a  remuneration  for  personal  activity,  a  wage  impersonally  received 
from  the  market  without  the  intervention  of  an  employer.  The  divi- 
dends to  stockholders  are,  then,  in  part  true  interest,  in  part  higher 
gains  received  because  of  the  danger  of  not  getting  any  gains  or-  of 
losing  the  principal,  in  part  profit  due  to  differentials  between  the 
burdensomeness  of  the  risk  and  its  compensation,  and  in  part  reward 
for  the  function  of  ultimate  supervision.  It  is  not  to  the  point  for 
present  purposes  to  ask  whether,  as  an  ethical  or  social  problem,  these 
last  are  more  or  less  than  adequate. 

Professor  Carver's  concept  is  more  nearly  in  line  with  the  later 
German  terminology  ;  wages  of  management  are  excluded. 

Notwithstanding  the  fact  that  in  one  place  he  notes  that  "it  would 
be  expensive  ....  to  grow  wheat  on  land  worth  $i,ooo  an  acre  for 
market  gardening;  such  land  is  worth  $i,ooo  an  acre  for  that  purpose 
because  of  the  large  profit  that  can  be  made  in  that  business  ;  to  grow 
wheat  would  be  a  sacrifice  of  these  profits"  (ibid.,  p.  42) — a  use  of 
profits  in  the  sense  of  aggregate  net  return — his  more  careful  formula- 
tion restricts  the  notion  to  "only  that  which  is  left  over  after  all  the 
other  shares  are  paid"  (ibid.,  p.  278).  Risk  profit,  by  which  is  meant 
the  excess  in  the  payment  for  the  risk  over  the  actual  burden  of  it, 
and  skill  in  bargaining  whereby  productive  agents  are  "more  fre- 
quently employed  at  a  price  slightly  under  than  slightly  over  their 
marginal  productivity,  explain  the  fact  that  business  men  as  a  class 
receive  a  share  in  addition  to  their  net  wages,  rent,  and  interest" 
(ibid.,  p.  269)  ;  that  is  to  say,  profits  are  something  over  and  above 
wages  of  management. 

But  on  the  whole,  if  these  authors  may  be  taken  as  representative, 
there  appears  to  be  in  economic  usage  some  clearing-up  of  the  old 
indefiniteness  in  the  meaning  of  the  term  profits,-  together  with  a  marked 
tendency  to  regard  profit  as  merely  a  subhead  under  the  general  principle 
of  wages — one  form  of  remuneration  for  the  personal  factor  in 
economic  activity. 

Professor  Seligman's  general  notion  of  profit  would  appear  to  be  in 
line  with  this  trend  : 

The  remuneration  of  the  entrepreneur,  or  the  man  who  carries  on  the 
enterprise,  is  called  the  profit.  Among  them,  wages,  interest  or  rent, 
and  profits  exhaust  the  whole  income.  (Seligman,  Principles  of  Eco- 
nomics,   p.    352.)       Profits    are    the    income    from    business    enterprise. 


PROFIT  DEFINED  loi 

(Ibid.,  p.  353.)  But  on  p.  427  it  is  said  :  "Profits  ....  are  the  chief 
inducement  to  enterprise.  The  anticipated  gains  to  be  derived  from 
fluctuations  in  value  constitute  the  real  incentive  to  business  activity, 
and   hence   to   modern   production." 

In  this  last  it  is  implied,  not  only  that  profits  cover  merely  such  part 
of  entrepreneur  income  as  is  due  to  value  fluctuations,  but  also  that 
modern  productive  enterprise  would  cease  to  function  were  these  con- 
juncture gains  eliminated — if,  that  is  to  say,  "a  state  of  normal  equilib- 
rium" were  realized.  And  with  profit  so  defined,  what  becomes  of  that 
part  of  the  entrepreneur's  share  not  due  to  value  fluctuations?  For 
we  are  to  remember  that  "wages,  interest  or  rent,  and  profits  exhaust 
the  whole  income."  This  share  must  seemingly  be  regarded  as  falling 
under  the  head  of  wages  of  management. 

What,  according  to  Professor  Seligman,  is  to  be  computed  as 
profit  in  the  hat-and-shoe  problem  (p.  88)  ?  "The  remuneration  of  the 
entrepreneur,    or    the    man    who    carries    on    the    enterprise,    is    called 

profit Wages,    rent    or    interest,    and    profit    exhaust    the    whole 

income."  Under  this  formulation  35  cents  per  hat  is  profit ;  but 
under  the  second  formulation — "the  gain  to  be  derived  from  fluctua- 
tions in  value"- — no  answer  is  yet  forthcoming. 

If  it  may  be  assumed  that  the  cost  investigation  is  important  only 
as  bearing  on  the  supply  term  of  the  value  equation,  and  that  with  any 
individual  producer  the  problem  of  cost  is  the  problem  of  how  much 
pay  he  must  receive  in  order  not  to  abandon  or  restrict  his  production, 
it  must  be  clear  that  the  hat-producer  in  our  assumed  case  will  submit 
to  a  price  of  $1.85  before  shifting  to  the  shoe  industry,  and  that  the 
wage  opening  of  15  cents  has  no  immediate  bearing  on  the  case:  $1.85 
is  the  cost  of  production:  15  cents  is  a  producer's  differential,  a  "quasi- 
rent  of  production,"  or  an  "unnecessary  profit" — or  an  excess  above 
minimum  profit,  or  whatever  else  it  may  be  preferred  to  call  it. 

But  how  about  the  following  formulation?  "Profits  are  always 
a  surplus  ;  they  are  the  difference  between  the  cost  of  production  and 
the  selling  price"  (p.  353).  "The  excess  of  price  above  cost  of  pro- 
duction constitutes  profit"  (p.  354).  On  p.  357,  however,  it  is  said  that 
"wages  are  a  stipulated  income,  and  profits  a  residual  income" — suggest- 
ing again  the  35-cent  solution  ;  but  it  is  immediately  added  :  "Wages 
are  part  of  cost :  profits  a  surplus  over  cost."  And  likewise  on  p.  356 
it  is  asserted :  "Profits  are  the  return  from  the  conduct  of  business 
enterprise" — a  35-cent  view ;  but  shortly  afterward,  «pon  the  same 
page :  "Interest  is  a  part  of  cost ;  profit  is  a  surplus  above  cost" — 
probably,  as  it  now  looks,  a  15-cent  view.  But  this  must  finally  depend 
upon  what  cost  of  production  is  held  to  be. 

But  evidently  a  producer  must  have  something  for  his  services : 
only  this  something  need  not  be  called  profit :  still  it  is,  as  we  have  seen, 
sometimes  so  called.     Sometimes,  however,   the  usage  falters  : 

"The  gross  earnings  would  suffice  to  give  him  a  bare  compensation 
for  his  services,  for  otherwise  he  would  enter  some  other  employment 
as  a  wage-earner.  [Necessarily  as  wage-earner?  or  necessarily,  if  as 
wage-earner,  in  some  other  line  of  employment?]  Gross  profits  must 
include  interest  and  wages.  But  there  would  be  no  net  profit,  or 
surplus  profit,  or  profit  in  the  real  sense  of  the  word"  (p.  354). 

Merely  noting,  in  passing,  that  the  necessary  wage  is  here  made 
part  of  cost,  it  becomes  evident  that  this  necessary  wage  is  not  made 
a  part  of  "net,  or  surplus  profits,  or  profits  in  the  real  sense  ;"  profits 
are,  on  the  contrary,  here  presented  as  that  part  of  personal  compensa- 


I02  VALUE  AND  DISTRIBUTION 

tion  above  the  amount  required  for  the  continuance  of  the  business; 
they  are  differential  profits  in  the  sense  of  that  other  terminology  that 
holds  that  "the  remuneration  of  the  entrepreneur,  or  the  man  who  carries 
on  the  business,  is  called  profit"  (p.  352)  ;  "Profits  are  the  income  from 
business  enterprise"  (p.  353).  This  net,  surplus,  or  real-profit  concept, 
then,  denotes  a  differential  above  necessary  cost,  and  gives  us  15  cents 
as  the  solution  of  our  problem  ;  and  this  goes  logically  along  with  the 
doctrine  that,  "profits  ....  are  the  difference  between  the  cost  of  pro- 
duction and  the  selling  price  (p.  353).  The  excess  of  price  over  cost 
constitutes  profit  (p.  354).  At  the  bottom  of  the  scale  is  the  marginal 
producer  working  under  the  least  favorable  circumstances,  and  who 
can  nevertheless  get  no  more  for  his  goods.  With  him  price  equals  cost. 
The   excess   of  price   over   cost   constitutes   profits"    (p.    354). 

But  still  another  concept  of  profits  presents  itself :  "Profits  are  the 
surplus  of  the  intra-marginal  over  the  marginal  producer"  (p.  353)  ;  not 
now,  be  it  noted,  a  surplus  above  what  one  must  have  to  keep  him  in 
the  business,  but  a  surplus  above  what  someone  else,  the  marginal  pro- 
ducer, must  have  to  keep  the  marginal  producer  in  the  business.  This, 
as  will  be  recalled,  was  Walker's  view ;  and  profit  with  Walker  was 
likewise  presented  as  no  part  of  cost ;  what  you  get  more  than  some- 
body else  gets  is  no  part  of  your  cost ;  it  follows  that  price  is  deter- 
mined by  the  cost  of  the  poorest  incapable  in  the  trade,  it  being  irrele- 
vant that  he  may  also  be  so  entirely  worthless  for  any  other  possible 
thing  that  he  would  not  change  occupations  at  any,  no  matter  how 
great,  fall  in  price  ;  and  the  profits  unnecessary  to  hold  in  the  trade  the 
master-minds  of  the  entrepreneur  world  are  whatever  they  are  getting 
more  than  this  rear-guard  good-for-naught. 

And  in  line  with  this  terminology  it  appears — as  it  consistently 
ought — that  this  poor  fellow  is  getting  no  profits ;  which  must  mean, 
according  to  the  earlier  formulation,  that  he  is  getting  no  differential 
above  his  best  alternative — which  obviously  may  or  may  not  be  true, 
and  is,  perhaps,  as  likely  to  be  true  of  the  most  prosperous  among  his 
competitors. 

Consistently  with  this  concept,  no  solution  is  possible  for  our 
problem  ;  upon  the  data  given,  no  single  entrepreneur,  other  than  this 
single-footed  incapable  at  the  alleged  margin,  could  ever  by  any  possi- 
bility determine  his  own  or  anyone's  else  cost  of  production. 

Bearing  in  mind  that  "net  or  surplus  profit,  or  profit  in  the  real 
sense,"  has  been  defined  as  surplus  over  cost — producer's  differential 
above  necessary  remuneration — we  approach  still  another  concept  of 
profit — a  notion  something  like  the  German  Conjuntur-ProHt.  Those 
compensations  accruing  to  personal  activity  and  management,  over  and 
above  what  must  be  ascribed  to  the  land  and  other  equipment  of  the 
entrepreneur,  may  undoubtedly  be  divided  accordingly  as  they  are  or 
are  not  due  to  changing  conditions — to  market  fluctuations — tardy  com- 
petition— conditions  which  are,  in  any  society,  always  in  process  of 
coming  not  to  be,  and  which  in  stationary  conditions  must  in  time  be 
canceled  through  the  complete  working  of  competition.  That  is  to  say, 
there  is  one  portion  of  the  entrepreneur's  income  which  may  be  said 
to  belong  to  him  by  a  sort  of  permanent  desert  and  right  ;  full  and 
complete  competition  would  only  serve  to  make  this  share  more  secure 
and  definite  ;  while  there  is  another  part  which  befalls  irregularly,  by 
luck  and  hazard,  and  without  ethical  basis,  or  claim  of  any  merit  other 
than,  possibly,  of  farsightedness,  and  only  through  the  perversities  and 
tangles  of  things.     There  are,   we  repeat,  gains  of  this  latter  sort,  as 


PROFIT  DEFINED  103 

truly  as  there  are  residuals  which  the  disappearance  of  these  fortuitous 
influences  would  never  reduce  or  menace.  Our  author's  present  concept 
of  profits  contemplates  these  fortuitous  quantities:  "Profits  are  a 
result  of  price,  not  a  cause  of  price.  Products  at  a  lower  cost  create 
profit ;  competition  forces  prices  down  to  lower  cost  and  eliminates 
profits.     Profits  can  be  maintained  only  by  the  creation  of  a  continually 

newer  cost-level  lower  than  the  new  price  (p.  357) For  as  soon 

as  profit  appeared,  the  entrepreneurs  in  other  fields  who  were  just  mak- 
ing expenses  would  at  once  bid  against  each  other  to  secure  capital  and 
labor,  until  they  would  capture  their  share  of  the  market,  and  the 
profits  would  dissipate  themselves,  on  the  one  hand  in  the  higher  rate 
paid  for  the  factors  of  production,  and,  on  the  other  hand,  in  the  lower 

price  of  the  product  due  to  the  greater  supply  (p.  354) It  may 

conceivably  happen,  indeed,  that  all  the  producers  at  a  particular 
moment  are  men  of  precisely  the  same  abilities  and  subject  to  the  same 

conditions There  would  be  only  one  identical  cost  for  all  units 

of  the  supply.     There   could,   then not  be   any  permanent  profit 

to  all  the  producers,  because  prices  could  not  permanently  remain 
above  the  mere  cost  of  producing"    (p.   245). 

It  is  evident  enough  that,  on  this  basis,  no  precise  answer  can  be 
given  to  the  inquiry  as  to  how  much  of  the  entrepreneur's  gain  is  due 
to  his  own  productive  activity,  and  how  much  to  the  gifts  of  fortune, 
through  the  flux  and  change  of  processes  and  values.  Neither  our  prob- 
lem as  stated  nor  any  other  problem  could  present  materials  from 
which  this  notion  of  profit  could  arrive  at  a  money  statement.  And 
with  this  uncertainty  as  to  the  competitive  share  of  the  remuneration 
there  must  go  also  an  equal  indefiniteness  as  to  the  other  share — the 
right,  due,  earned,  just,  enduring  share.  Thus  this  fifth  or  sixth  variety 
of  profit  appears  to  promise  greater  service  in  ethical — or  possibly 
sociological — discussion  than  in  the  field  of  economic  analysis.  It 
remains,  however,  certain  that  something  of  this  rightful  and  natural 
share  there  must  be — quantitatively  and  qualitatively  vague  doubtless, 
but  existent.     But  we  find  it  written : 

"Wages  differ  from  profits  in  that  wages  are  a   stipulated  income 

and  profits  a  residual  income Wages  are  a  part  of  cost,  profits  a 

surplus  above  cost.  The  entreprenuer  may  think  that  he  deserves  a 
return  for  his  services,  but  whether  he  secures  one  depends  upon  his 
competitors.  There  is  always  a  certain  level  below  which  wages  cannot 
fall,  because  no  work  would  otherwise  be  done  ;  but  the  very  continuance 
of  competitive  profit  depends  upon  the  abler  producer  cutting  down 
cost  to  the  point  where  the  marginal  producer  earns  no  profits  (p.  357). 
In  society  in  a  state  of  rest  ....  the  marginal  producer  would  hardly 
make  both  ends  meet,  but  would  earn  nothing  above  his  cost"  (p.  246). 

This  last  statement  seems  to  imply  that  all  compensation  that  does 
not  accrue  as  gift  of  fortune  is  cost — that  is,  is  necessary  compensation. 
Thus  the  doctrine  which  under  stable  equilibrium  would  deny  to  any 
producer  anything  above  his  necessary  remuneration  would  amount  to 
assigning  to  him  in  his  best  field  of  activity  precisely  what — and  no 
more  than  what — he  would  be  worth  in  his  next  best  field,  this  ethically 
just  ending  in  the  strange  perversity  of  measuring  what  one  can  do, 
not  by  what  he  does,  but  by  what  he  would  do  if  he  did  not  do  so 
much. 

It  is  evident  enough  that  we  are  thus  far  all  the  while  within  the 
field  of  individualistic  entrepreneur  cost ;  and  in  this  field  there  is  still 
one  more  cost  concept  to  be  presented : 


I04  VALUE  AND  DISTRIBUTION 

"To  the  employer  cost  means  total  cash  outlay  expended  in  produc- 
tion ;"  and  it  is  added :  "Here  the  cost  is  usually  less  than  the  price, 
the  difference  between  cost  [cash  outlay]  and  price  being  profit."  This, 
however,  may  possibly  not  be  fairly  interpreted  as  a  fifth — or  sixth — 
profit  concept,  since  the  notion  of  profit  here  held  would  finally  resolve 
itself  into  total  remuneration   for  entrepreneur  activity. 

Professor  Flux's  interpretation  of  the  relations  of  profit  to  cost 
is  to  be  deduced  from  the  following : 

"The  influence  of  cost  is  felt  in  determining  whether  it  is  profitable 
to   produce   that   supply   in  view   of   securing  the   price    so   determined, 

whether    the   supply   can  be,    economically    speaking,    maintained 

The  term  'supply  price'  here  used  means  a  price  adequate  to  induce 
producers  to  prepare,  and  offer  for  exchange,  a  supply  corresponding 
to  that  price.  It  must  therefore  be  a  price  sufficient  to  cover  cost  of 
production,  and,  if  competition  be  vigorous,  the  excess  over  cost  of  pro- 
duction will  not  be  more  than  sufficient  to  afford  such  profits  as  com- 
petitors need  to  secure  in  order  to  continue  in  competition.  Some 
writers  use  the  phrase  'necessary  profits'  to  apply  to  the  level  to  which 
competition  tends  to  reduce  profits,  and  such  'necessary'  profits  are 
often  taken  to  be  included   in  cost  of  production"    (pp.   52  and  57), 

Stopping  merely  to  note  that  expenses  of  production  and  cost  of 
production  are  here  used  as  interchangeable  terms,  we  deduce  from  the 
passage  cited  that  the  amount  to  be  fixed  as  the  cost  requirement  is  not 
necessarily  $1.85  or  $1.80,  but  is  a  sum  "not  more  than  sufficient  to 
afford  such  profits  as  competitors  need  in  order  to  continue  in  pro- 
duction." Profits  which  would  content  other  producers  are  the  "neces- 
sary profits"  for  this  producer,  whether  or  not — one  takes  it — he  finds 
himself  on  any  other  ground  able  to  be  contented. 

Fetter  holds  that,  "the  value  of  the  product  as  a  whole  cannot  be 
related  to  the  psychic  cost  or  sacrifices  ["pain,  fatigue,  irksomeness  of 
labor"]  and  therefore  it  cannot  serve  as  a  measure  of  cost  in  every- 
day business.  Alternative  cost  is  any  good  or  gratification  that  must  be 
given  up  when  any  other  good  is  chosen.  In  this  sense  each  thing  is  a 
cost  of  every  other  thing  that  might  be  chosen  in  the  place  of  it. 
Alternative  cost  is,  therefore,  manifold  and  indefinite.  The  thought  is 
significant  at  the  moment  of  choice,  but  is  not  constantly  measurable 
for    practical    purposes.      Money    cost    is    the    practical    cost    generally 

implied    in  the  term   cost   of   production The   enterpriser's   costs 

determine  the  lowest  price  at  which  he  can  continue  to  sell,  but  if  suc- 
cessful, he  may  have  a  wider  margin   of  profit"    (p.   274). 

Recalling  that  Fetter's  definition  of  profit  is  "the  income  attribu- 
table to  the  enterpriser's  services,"  and  remembering  that  displacement 
costs  must  not  be  regarded,  and  that  only  the  "money  paid  out  by  the 
producer"  is  "practical  cost,"  $1.50  or  $1.65  must  be  Fetter's  solution 
of  the  problem  in  hand.  And  yet  $1.65  is  clearly  not  "the  lowest  price 
at  which  he  can  continue  to  sell ;"  it  is  much  lower  than  the  lowest. 

With  Seager  the  distinction  between  cost  of  production  and  expenses 
of  production  is  significant.  In  cost  he  reflects  the  old  doctrine  of  pain 
cost — psychic  cost,  as  Fetter  has  it — but  with  the  addition  of  some 
modern  doctrine  about  displaced  leisure  and  displaced  consumption- 
time.      "The    sum    of   the    efforts    and    sacrifices    that    are    involved    in 


PROFIT  DEFINED  I05 

production  constitute  ....  the  cost  of  production Effort,  .... 

exercise  which  involves  some  discomfort  or  pain  ....  sacri- 
fices  the  doing  of  things  that  are  less  pleasurable  than  other 

things  that  might  have  been  done  but  free  from  any  element  of  pain" 
(P-  53)-  Just  what  use  or  part  this  kind  of  cost  has  in  Seager's  system 
of  theory  is  not  easy  to  get  at ;  but  "contrasted  with  the  costs  of  pro- 
duction which  are  psychological  or  subjective,  are  the  expenses  of 
production — advances  made  for  materials  and  other  things  which 
co-operate  in  bringing  about  productive  results.  The  latter  are  objec- 
tive and  may  be  expressed  as  sums  of  money  comparable  with  the 
prices  received  for  products"   (p.  54). 

Whether  these  costs  are  confined  to  those  technological  facts  which 
aid  in  bringing  about  productive  results— a  social  concept  of  produc- 
tiveness— or  whether  "all  other  things"  includes  expenses  for  patents, 
royalties,  franchises,  privileges,  good-will,  legislative  and  municipal 
favors,  etc. — that  is,  whether  the  production  under  consideration  is 
conceived  private-wise  and  competitively,  as  matter  of  individual 
acquisition,  need  not  concern  us  here.  At  any  rate,  "the  expenses  of 
production  include  every  item  of  outlay  which  producers  must 
normally  and  regularly  incur  to  put  goods  on  the  market  and  effect 
their  sale,  and  also  such  compensation  as  producers  normally  and 
regularly  require  as  the  condition  of  their  continuing  to  serve 
industrial  society  in  the  capacity  of  entrepreneurs.  These  items  are 
as  follows:  (i)  Outlay  for  materials,  wear  and  tear  of  buildings  and 
machinery,  etc.,  which  may  be  included  under  the  expenses  of  repla- 
cing capital  goods  used  up  in  production.  (2)  Premiums  paid  for  the 
insurance  of  capital  goods.  (3)  Interest  for  the  use  of  capital.  (4) 
Wages  to  laborers  of  all  grades.  (5)  Rent  of  land  and  natural  power 
used  in  production.  (6)  Taxes.  (7)  Minimum  profits  to  the  entre- 
preneur to  remunerate  him  for  his  own  time  and  trouble"   (p.   157.) 

What  then  would  be  Seager's  answer  to  our  hat-cost  problem  ? 
How  much  as  cost  shall  be  allowed  under  the  head  of  minimum  profits? 
Seager  has  a  displacement-cost  doctrine  ;  but  wage  or  salary  alternatives 
are  the  only  ones  admitted  to  consideration :  "The  amount  that 
should  be  charged  as  wages  of  management  or  minimum  profit  is  what 
the  entrepreneur  could  obtain  for  his  services  if  he  worked  for  wages 
or  for  a  salary  for  a  corporation  or  other  employer"  (p.  159).  One 
dollar  and  eighty  cents  is  then  the  answer.  But  it  is  nevertheless  clear 
that  at  anything  short  of  $1.85   he  will   shift  to  shoe  production. 

Now  let  the  problem  be  modified  somewhat ;  let  the  raw  materials 
and  the  wages  aggregate  $1.50  as  before,  but  assume  an  interest  out- 
payment  of  10  cents,  the  employer  using  his  own  capital  to  the  interest 
value  of  5  cents.  Will  this  modify  the  solutions  given?  Not  with 
Seager:  expenses  are  to  be  understood  as  including  interest  items  of 
this  sort :  "The  item  appears  whether,  in  the  particular  business,  bor- 
rowed   capital    or    capital    belonging    to    the    firm    is    used It    is 

virtual  outlay,"  Precisely  so :  but  expenses  strikes  one  as  a  passably 
poor  term  to  denote  the  interest  on  one's  own  capital ;  and  it  is  outlay 
of  any  sort  only  in  the  sense  of  a  displacement  fact — an  opportunity 
cost. 

It  is  difficult  to  be  certain  of  what  Fetter  would  make  of  this  case, 
though  it  is  fair  to  suppose  that,  by  some  sort  of  recognition  of  this 
phase  of  displacement  cost,  he  would  somehow  arrive  at  a  conclusion 
similar  to  that  of  Seager.     And   for  him  also  the  awkwardness  would 


io6  VALUE  AND  DISTRIBUTION 

present  itself  of  making  this  cost  fall  within  "the  sum  of  money  paid 
out  by  the  producer." 

With  Flux  likewise  the  solution  would  probably  be  the  same, 
though  it  does  not  clearly  appear  how,  unless  upon  the  ground  that 
other  and  competing  producers  would  not  be  satisfied  were  their 
capital  not  earning  a  certain  specified  rate,  which  rate  the  shoe  manu- 
facturer is  thereby  justified  in  computing  as  within  his  expenses. 

Carver's  definition  of  profit  as  what  is  left  over  "after  the  other 
shares  are  paid,"  these  other  shares  including  wages  of  superintend- 
ence, obviously  excludes  profits  from  the  case,  but  none  the  less  leaves 
it  to  be  asked  what  relation  entrepreneur  activity  holds  to  costs  and  to 
value. 

Accepting  one  formulation,  "The  amount  of  effort  which  is  neces- 
sary to  produce  a  given  quantity,  say  a  pound,  of  one  commodity  may 
be  widely  different  from  that  which  is  necessary  to  produce  the  same 

quantity  of  another When  it  requires  a  great  deal  of  effort  to 

produce    an    article,    no    one   will    ordinarily   be   tempted    to    make   that 

effort    unless    the    article    has    a    great    deal    of    value Speaking 

generally,  an  article  must  have  value  enough  to  persuade  men  to 
make  whatever  effort  is  necessary  to  its  production,   or  it  will  not  be 

made  at   all That    is    to    say,    its   value    cannot   be    permanently 

much  above  or  below  its  cost  of  production"  (p.  31) — we  are  far  from 
any  answer  to  our  problem  ;  the  principle  of  value  is  here  stated  as  one 
of  pain  costs  to  the  employed  producer ;  the  doctrine  is  not  an  entre- 
preneur money-cost  doctrine  in  any  sense ;  the  "efforts  necessary  to  its 
production"  are  not  employer  facts.  For  the  purposes  of  the  problem 
in  hand,  this  is  an  impasse. 

But  Carver  has  an  opportunity-cost  doctrine  which  promises 
better:  "If  there  are  many  and  excellent  opportunities  for  the  employ- 
ment of  one's  labor  and  capital,  and  their  earnings  consequently 
large,  much  will  be  sacrificed  in  withdrawing  them  from  those  other 
possible   openings,    and   only   the    surplus   above   this   large  amount   can 

count    as    the    earnings    of    the    land If    a    certain    individual 

with  a  certain  amount  of  labor  and  capital  at  his  disposal  can  earn 
$1,000  a  year  by  working  for  other  people  ....  a  piece  of  land  upon 
which  he  with  his  capital  could  produce  a  total  crop  worth  only 
$1,000  would  be  worth  nothing  to  him,  but  one  upon  which  he  could  pro- 
duce a  crop  worth  $1,200  would  be  worth  approximately  $200  a  year" 
(p.  188). 

Like  Seager's  view,  this  appears  to  conceive  the  displacement  cost 
as  fixed  by  the  wage  or  salary  opportunity;  $1.80  is  therefore 
Carver's    solution. 


CHAPTER   IX 
EARLY   UTILITY   THEORY:     SAY 

Dr.  Sewall  ^  has  made  it  clear  that,  in  the  main,  early 
value  theory — for  what  there  was  of  it— was  of  the  labor- 
cost  tenor.  Mercantilism,  for  the  most  part,  conceived 
labor  as  the  basis  of  value,  the  notion  standing,  both  for 
labor  and  for  product,  as  one  of  intrinsic  or  natural  value 
as  an  objective  quality. 

The  Physiocrats  also  were  pronouncedly  objective  in 
their  notion  of  value,  identifying  wealth  with  material 
objects,  and  value  intermediately  with  cost  of  production, 
truly, — but  finally  and  essentially,  with  the  material  land 
product  embodied  in  a  commodity,  and  especially  with  the 
subsistence  material  consumed  by  the  artisans.  And  if  it 
be  historically  the  fact  that  the  wage  level  of  French  labor 
left  no  surplus  above  the  subsistence  requirement  of  that 
time,  it  must  be  admitted  that  the  doctrine  as  held  did  not 
seriously  misinterpret  the  facts  with  which  it  had  to  do; 
wages  cost  and  subsistence  cost  must,  under  the  conditions 
assumed,  be  approximately  equal. 

But  there  were  in  Italy,  even  as  early  as  the  sixteenth 
century,  the  beginnings  of  the  other  line  of  thought.  Da- 
vanzati  (1588)  recognized  clearly  the  notion  of  utility  as 
subjective  fact  and  as  determinative  of  exchange  value. 
"A  disgusting  thing  is  a  rat;  but  in  the  siege  of  Cesalino 
one  of  them  was  sold  for  200  florins,  on  account  of  the 
great  scarcity ;  and  it  was  not  dear,  for  he  who  sold  it  died 
and  he  who  bought  it  escaped."  So  Turgot  (France,  1775), 
following     Galiani      (Naples,      1750),     explained     value, 

^  Hannah  Robie  Sewall,  Ph.D.,  "The  Theory  of  Value  before  Adam 
Smith,"   Publications   of  American  Economic   Association,    1901. 

107 


io8  VALUE  AND  DISTRIBUTION 

psychologically  and  subjectively,  as  the  effect  of  conditions 
acting  through  feeling. 

But  the  first  systematic  exponent  of  the  utility  school  of 
value  was  J.  B.  Say.^ 

Inasmuch  as  the  need  of  things  must  lie  behind  the 
labor  production  of  them,  and  the  need  of  product  lie 
behind  the  esteem  accorded  to  instruments  of  production, 
desire  being  the  psychological  explanation  for  the  putting- 
forth  of  effort,  it  seemed  clear  to  Say  that  the  ultimate 
explanation  of  value  must  be  found,  not  in  cost,  but  in 
utility.  From  the  point  of  view  of  motive,  consumption  is 
fundamental  to  production ;  thereby  the  process  of  valua- 
tion must,  in  the  last  analysis,  be  a  question  of  the  relation 
of  product  to  consumption,  and  not  of  product  to  produc- 
tion. 

But  note  that,  accordingly  as  economic  affairs  are  dif- 
ferently conceived,  this  may  or  may  not  involve  the  propo- 
sition that  demand  precedes  supply  and  controls  it.  In  the 
collectivist  or  in  the  isolated-individual  economy,  desire 
and  demand,  as  we  have  seen,  are  one.  And  in  a  competi- 
tive exchange-value  economy,  viewing  society  as  a  whole, 
and  regarding,  for  the  purposes  of  the  case,  the  existence 
or  non-existence  of  a  money  intermediate  as  irrelevant, 
total  supply  is  total  demand ;  demand  and  supply  are  merely 
different  aspects  of  the  same  aggregate  of  commodities. 
But  if,  on  the  other  hand,  commodities  are  regarded,  not  as 
an  aggregate  but  as  made  up  of  separate  kinds  and  classes, 
it  must  be  true  that  only  effective  demand,  demand  coupled 
with  purchasing  power,  can  control  and  direct  supply ;  and 
this  is  especially  and  obtrusively  true  under  a  money 
economy. 

Say,  however,  saw  no  occasion  to  trouble  himself  with 

these  refinements.    He  accepted  the  obvious  truth  that  price 

cannot   continuously    remain    beneath    cost   of   production ; 

nevertheless,  not  the  cost  but  the  utility  determines  what  the 

purchaser  may  be  made  to  pay;  if  the  product  is  not  useful, 

no  one  will  pay  anything  for  it,  no  matter  what  the  cost : 

'Say,  Traite  d' economic  politique;  all  references  are  to  the  8tli 
edition,  Guillaumin  et  Cie,  Paris,   1876. 


EARLY  UTILITY  THEORY:  SAY  109 

Where  a  receptacle  is  placed  under  a  fountain,  the  sides  of  the 
receptacle  do  not  determine  the  flow  of  the  water,  though  they  do 
prevent  the  level  of  the  water  from  falling  below  a  certain  point.' 

Ricardo  would,  however,  have  taken  no  issue  here.  On 
August  15,  181 5,  he  wrote  to  Say, 

The  utility  of  things  is  unquestionably  the  basis  of  their  value. 
But  the  degree  of  their  utility  cannot  be  the  measure  of  their  value; 
the  measure  is  in  the  difficulty  of  production. 

But  Say,  on  his  part,  is  careful  not  to  assert  that  utility 
measures  value,  but  only  that  value  measures  utility.*  His 
position  seems  to  be  that  the  utility  determines  the  value, 
causes  it,  and  thus,  under  the  general  principle  that  the 
quantimi  of  cause  may  be  inferred  from  the  magnitude  of 
its  effect,  gets  measured  in  it;  utility,  being  purely  an  indi- 
vidual matter,  cannot  express  or  measure  market  value, 
but,  through  demand,  it  determines  the  market  value,  which 
market  value  is  thus  the  sole  medium  of  expression,  the 
sole  common  denominator,  in  which,  whether  accurately  or 
approximately,  the  social  or  general  esteem  for  utility 
receives  its  statement. 

Thus  interpreted,  the  issue  between  Say  and  Ricardo 
may  be  formulated  about  as  follows : 

Ricardo,  admitting  the  fundamental  role  of  utility  and 
not  at  all  denying  the  directive  character  of  demand,  treats 
demand  as  practically  a  constant,  and  explains  value  varia- 
tions through  variations  in  the  relative  labor  application. 

Say  emphasizes  variations  in  demand  as  fundamental 
and  directive,  but  gives  to  variations  in  supply  full  account 
by  way  of  variations  in  entrepreneur  cost : 

The  need  of  a  thing  causes  the  demand;  the  expenses  necessary 
to  produce  the  thing  limit  the  supply.  If  to  the  consumer  the  thing 
is  worth  its  cost,  the  thing  gets  purchased." 

'  Say,  op.  cit.,  Book  I,  chap,  i,   p.  61. 

*  "You  accuse  me  of  saying  that  utility  is  the  measure  of  value. 
I  thought  I  had  always  said  that  the  value  that  men  attach  to  a  ming 
is  the  measure  of  the  utility  that  they  find  in  it." — Letter  to  Ricardo, 
December  2,   1815, 

'Say  to  Ricardo,  July   19,   1821. 


no  VALUE  AND  DISTRIBUTION 

Value,  in  Ricardo's  doctrine,  is  proportional  to  labor — 
through  entrepreneur  cost,  it  is  true — but  exclusive  of  land 
and  capital  disturbances.  With  Say,  value  is  proportional 
to  entrepreneur  cost  inclusive  of  rent  and  interest  outlays. 

Ricardo  would  have  labor  measure  value,  labor  itself 
the  while  receiving  no  measure.  With  Say,  value  measures 
utility,  value  receiving  no  measure. 

In  answer  to  Ricardo's  vigorous  denial  that  the  value  of 
the  labor  determines  the  value  of  the  product,  "a  view  which 
I  strive  with  all  my  might  to  refute,"  and  his  insistence  that 
it  is  only  the  comparative  quantity  of  labor  that  rules  the 
relative  value  of  products,*"'  Say  objects  that  there  is  really 
no  distinction,  since  "3'ou  cannot  determine  the  quantity 
of  labor  except  according  to  the  price  that  you  pay  for 
it"''' — that  is  to  say,  labor,  unless  it  can  be  shown  to  possess 
some  basis  of  original  and  fundamental  homogeneity,  must 
be  rendered  into  terms  of  value  before  a  proportion  can  be 
based  upon  it;  but  thereby  labor  must  itself  have  received 
a  measure.  Still,  it  was  not  fairly  open  to  Say  to  condemn 
this  for  its  question-begging  quality,  in  view  of  the  fact, 
as  we  shall  later  see,  that  his  own  course  of  argument  ran 
as  follows :  having  traced  value  upon  the  demand  side,  to 
utility,  he  appeals  upon  the  supply  side,  as  does  Ricardo,  to 
the  entrepreneur  mechanism  and  explains  the  values  of  the 
products  by  the  values  of  the  costs;  and  then,  to  explain  the 
values  of  the  costs,  reverts  to  the  value  of  the  products.^ 

°  Ricardo  to   Say,  January   15,    1820. 

'  Say  to  Ricardo,  November  2,  1820. 

*  It  will,  perhaps,  be  well  to  report  the  precise  words  of  this 
correspondence,  in  the  terms  of  the  authority  from  which  it  is  taken  ; 
Ricardo's    letters,    were,    however,    originally    written    in    English : 

Ricardo  to  Say,  August  15,  1815:  "L'utilite  des  choses  est  incon- 
testablement  le  fondement  de  leur  valeur ;  mais  le  degrc  de  leur  utilite  ne 
saurait  etre  la  mesure  de  leur  valeur.  Une  marchandise  d'une  pro- 
duction difficile  sera  toujours  plus  chcre  (jue  celle  que  Ton  produit 
aisement,  quand  mcme  les  homnies  conviendraient  unanimement  quelle 
est  plus  utile  que  I'autre.  II  est  bien  vrai  qu'il  faut  qu'un  produit 
soit  utile  pour  avoir  de  la  valeur;  mais  la  difficultc  de  sa  production 
est  la  seule  mesure  de  sa  valeur." 

Say  to  Ricardo,  December  2,  1815:  "II  faut  que  je  me  sois  bien 
mal  explique,   puisque  vous   m'accusez   d'avoir  dit   que   l'utilite  etait  la 


EARLY  UTILITY  THEORY:  SAY  m 

Ricardo  in  a  letter  to  Malthus,  October  lo,  1820,  says 
of  Say: 

He  pretends  that  a  commodity  is  valuable  in  proportion  to  its 
utility.     This  would  be  true  if  buyers  only  regulated  the  prices  of 

commodities But   the   buyers    have    the    least    in    the    world 

to  do  with  regulating  the  price;  it  is  all  done  by  the  competition  of 
the  sellers. 

And  again,  on  November  24,  1820: 

I  do  not  dispute  the  influence  of  demand  on  the  price  of  corn  or 
on  the  price  of  other  things,  but  supply  follows  close  at  its  heels, 
and  soon  takes  the  power  of  regulating  price  into  its  own  hands." 

It  is  not,  however,  clear  that  Say  asserts  value  to  be  in 
proportion  to  utility.  His  position  is  merely  that  value 
measures  utility ;  in  ultimate  analysis,  also — though  it  is 
not  clear  that  Say  recognized  it — value  cannot  be  in  pro- 
portion to  utility,  since  being  a  purely  personal  category, 
utility  to  one  man  is  not  commensurable  with  utility  to 
another  man ;  only  through  affecting  demand  can  utility  be 
relevant  to  market  value.    And  the  case  stands  the  same  if 


mesure  de  la  valeur ;  tandis  que  je  croyais  avoir  toujours  dit  que  la 
valeur  que  les  hommes  attachent  a  une  chose  est  la  mesure  de  I'utilite 

qu'ils  trouvent  en  elle Je  conviens  de  meme,  avec  vous,  que  la 

valeur  d'un  produit  ne  peut  pas  baisser  audessous  de  ce  que  coutent  les 
difficultes  de  sa  production.  Si  les  hommes  estiment  que  son  utilite  vaut 
ce  prix-la,  ils  le  produisent ;  s'ils  estiment  que  son  utilite  ne  vaut 
pas  ce  prix-la,   ils  ne  le  produisent  pas." 

Ricardo  to  Say,  January  ii,  1820:  "Vous  me  paraissez  avoir  mal 
comprit  une  de  mes  propositions.  Je  ne  dis  pas  que  c'est  la  valeur  du 
travail  qui  regie  la  valeur  des  produit s ;  c'est  une  opinion  que  je 
cherche,  de  tout  mon  pouvoir,  a  detruire.  Je  dis  que  c'est  la  qtiantite 
comparative  du,  travail  necessaire  a  la  production  qui  regie  la  valeur 
relative  des  produits." 

Say  to  Ricardo,  March  2,  1820:  "Je  vous  avoue  que  je  ne  com- 
prends  pas  trop  la  difference  que  vous  etablissez  entre  la  valeur  du 
travail  qui  ne  determine  pas  ia  valeur  des  produits,  et  la  quantite  du 
travail  necessaire  a  leur  production  qui  determine  la  valeur  des 
produits.  II  me  semble  que  vous  ne  pouvez  determiner  la  quantite  et 
la  qualite  du  travail  que  par  le  prix  que  Ton  paie  pour  I'obtenir.  C'est 
du  moins  ce  que  j'ai  toujours  entendu  par  la  quantite  de  ce  service 
productif  que  j'ai  appelle  service  industriel.  Son  prix  fait  partie  des 
frais  de  production,  et  vous-meme  etablissez  tres-justement  que 
I'ensemble  des  frais  de  production  regie  la  valeur  du  produit." — 
CEuvres  diverses  de  J.  B.  Say,  Paris,  Guillaumin  et  Cie,  1848,  Vol.  IV, 
pp.   409-15,   passim. 

*  Bonar,  Letters  of  Ricardo   to  Malthus,  p.    172. 


112  VALUE  AND  DISTRIBUTION 

carried  out  to  the  marginal  analysis ;  the  marginal  buyer 
may  consume  at  a  very  high  rate  of  utility  or  at  a  very  low 
rate.  At  the  margin,  as  elsewhere  under  the  competitive 
system,  things  go,  not  according  to  the  highest  utility,  not 
to  those  persons  to  whom  the  greatest  service  would  accrue, 
but  to  those  whose  estimate  of  utility  is  highest  relatively 
to  other  things, — to  those  persons,  namely,  who  will  forego 
the  largest  market-value  total ;  the  rich  man  buys  what  the 
poor  man  goes  without. 

But  Say  is  nevertheless  right  in  asserting  the  value 
measure  of  utility  to  be  a  fact,  in  the  sense  that  by  price 
some  sort  of  appraisal  of  utility  is  expressed  in  terms  of  a 
standard,  no  matter  how  wide  of  strict  proportionality  to 
utility  the  price  may  fall,  or  how  loose  and  inaccurate  a 
measure  it  may  be,  and  no  matter  to  what  man,  marginal  or 
other,  it  may  be  a  measure — and  would  perhaps  be  right  in 
asserting  that  there  can  be  no  other  measure ;  and  he  might, 
perhaps,  have  also  done  well  to  deny — if,  indeed,  he  did 
not  deny — that  there  can  be  any  measure  of  value,  except, 
of  course,  in  some  conventional  standard,  like  this  of  money. 
Has,  in  truth,  value  any  other  statement  than  by  equiva- 
lency in  other  things  of  value?  Will  values  reduce  to  homo- 
geneous utility  ?  Say  did  not  assert  that  they  would ;  later 
writers,  fortunately  or  otherwise,  have  so  asserted. 

The  value  of  a  thing,  in  Say's  view,  rests  upon  the 
fact  that  the  thing  has  utility ;  this  value  indicates  that  "it 
is  esteemed  as  highly  as  a  certain  quantity  of  another  indi- 
cated thing."  ^°  But  this  value  presents  not  the  owner's 
valuation  nor  that  of  any  other  individual:  it  is  a  fact  of 
general  estimation,  a  question  of  what  will  be  paid — seem- 
ingly some  sort  of  vague  foreshadowing  of  the  society-as- 
an-organism  concept. 

"The  price  of  products  is  established  in  each  market  at 
the  limit  fixed  by  the  cost  of  production,  provided  that  the 
utility  which  is  ascribed  to  the  products  promotes  the  desire 
to  acquire  them."  ^^    It  remains,  then,  to  seek  out  the  causes 

^^  Say,  Traite  d'cconomie  politique,  Livre  II,  chap,  i,  p.  Z2Z,  8th  ed. 
Paris:     Guillaumin  et  Cie,   1876. 

^^  Ibid.,  p.  341. 


EARLY  UTILITY  THEORY:  SAY  113 

which  determine  the  prices  of  the  productive  agents  (fonds 
productifs).  ^^ 

Say's  doctrine  is  that  utiHty  is  primary  and  cost  the 
resistance,  which  cost  is  determined  by  the  values  borne 
by  the  productive  agents  employed.  This  makes  value  in 
the  agent  a  cause  of  value  in  the  product;  but  directly  the 
value  of  the  product  will  be  made  the  source  of  value  in  the 
agent.  And  it  is  not  made  clear  what  relation  the  entre- 
preneur's services  hold  to  the  result.  Do  these  also  give 
value  at  the  same  time  that  they  receive  it? 

Say  admits  that  if  production  were  merely  a  matter  of 
labor,  with  all  labor  at  one  level  of  efficiency  and  of  wage, 
those  products  requiring  equal  amounts  of  labor  would 
have  relative  prices  to  correspond.  But  land  and  capital 
come  in,  and  different  qualities  of  men  and  of  land  come 
in,  and  products  are  the  dearer  the  more  and  the  dearer 
are,  in  the  aggregate,  the  productive  energies  employed  in 
bringing  them  to  market.  "The  price  will  be  the  sum 
necessary  to  pay  the  expenses  indispensable  to  the  creation 
of  the  commodity."  " 

Say  has  small  regard  for  the  view  that  all  differences 
in  wages  are  explained  by  the  different  costs  of  rearing  and 
of  preparation,  so  that,  all  the  data  being  considered,  all 
wages  are  equal.  And  if  exception  is  made  of  native  talent 
and  of  circumstances  of  environment,  these  exceptions,  he 
rightly  insists,  invalidate  the  rule.^* 

It  is  interesting  to  note  that  Say  has,  nevertheless,  a 
doctrine  of  real  value  and  of  real  cost.  In  general  con- 
formity with  the  reasonings  of  Smith  and  Ricardo,  real 
value  and  real  cost  are  worked  out  as  dependent  upon  the 
pain  conditions  of  production  and  expressive  of  them.  So 
real  value  may  fall  while  exchange  values  are  not  affected 
— a  clear  recognition  of  the  fact  that  only  relative  costs 
are  important  for  exchange  value.^^ 

But  to  return  to  Say's  explanation  for  the  valuation  of 

"  Ibid.,  p.  342. 

Fonds  productifs  are   something  more,   in  Say's  thought,   than   the 

mere  objective  physical  facts:  they  are  valued — funded — and  thereby 
capable  of  functioning  as  cost  data. 

"Ibid.,  p.  342.  ^*  Ibid.,   p.   343.  ^'^ Ibid.,  pp.  343-52. 


114  VALUE  AND  DISTRIBUTION 

cost  goods :  It  is  interesting  to  note  that  all  of  this  discus- 
sion falls,  with  him,  under  the  head  of  distribution.  Say, 
like  J.  S.  Mill,  takes  value  and  distribution  to  be  parts  of 
one  problem.  And  if  wages  and  interest  are  costs  and,  as 
such,  influence  value,  this  conclusion  seems  to  be  inevitable ; 
incomes,  while  distributive  shares  to  their  recipients,  are 
costs  to  those  who  disburse  them  as  production  outlays. 
There  is  no  escape  from  this  unless  in  denying  that  dis- 
tributive shares  are  determined  by  values.  And  this  seems 
to  say  that  it  is  only  the  classical  school  who  can  separate 
value  and  distribution;  and  in  the  main  they  did  not, 
though  it  is  true  that  subsistence  cost  for  wages 
and  abstinence  cost  for  interest  were  each,  upon 
occasion,  appealed  to  as  determinants  of  the  com- 
pensations fundamental  to  value.  The  later  school  can- 
not logically  make  the  separation — and  yet,  as  we  shall  see, 
they  somehow  make  it.  It  is,  however,  to  be  said  that,  other- 
wise than  upon  this  separatist  treatment,  the  position  of  the 
later  school  would  appear  somewhat  too  obtrusively  to 
involve  this  circuity  of  explaining  costs  by  value  and  value 
by  costs. ^"^ 

The  current  value  of  these  productive  agents  (fonds)  .... 
is  established  according  to  the  same  principle  as  the  value  of  other 

things But   the   quantity    demanded    cannot    have    as    motive 

the  satisfaction  of  consumption.  A  field  or  a  factory  does  not 
directly  procure  any  satisfaction  for  its  possessor.  Their  value 
comes,  then,  from  the  value  of  the  product  which  can  be  derived 
from  them,  this  depending,  in  turn,  upon  the  use  that  can  be  made 
of  the  product,  the  satisfaction  that  can  be  derived  from  it." 

'*  Nor,  if  scientific  explanation  or  intelligible  exposition  is  the 
end  in  view,  is  it  a  sufficient  disposition  of  the  case  to  declare  it 
organic,  and  thereby  to  assert  or  infer  that  circular  reasoning  is  both 
justifiable  and  inevitable.  This  is  simply  to  throw  up  the  hands,  to 
abandon  the  problem.  There  may,  it  is  true,  be  nothing  else  for  it, 
but  if  this  is  so,  let  it  be  so  said  and  an  end  made  of  the  talking : 
surely  by  those  who  assume  explanation  to  be  impossible,  the  offering 
of  further  explanations  is  gratuitous. 

In  this  connection,  a  note  of  Say's  at  the  bottom  of  page  :^73  will 
be  of  interest :  "I  have  long  doubted  whether  in  the  plan  of  this  work 
I  should  develop  what  relates  to  value  before  what  relates  to  pro- 
duction, that  which  shows  the  nature  of  the  produced  fact  before  the 
manner  of  its  production.  It  has  seemed  to  me  that  in  order  to  under- 
stand the  foundations  of  value  it  is  necessary  to  know  in  what  the 
costs  of  production  consist,  and,  to  that  end,  to  form  in  advance  wide 
and  accurate  notions  of  the  agents  of  production  and  of  the  services 
which  may  be  derived  from  them." 

"  Say,  op.  cit.,  p.  367. 


EARLY  UTILITY  THEORY:   SAY  1 15 

The  foregoing  would  seem  to  deny  the  influence  of  cost 
and  to  place  the  determination  of  value  entirely  with  utility. 
And  to  assert,  as  does  Say  elsewhere,  that  each  cost  has  its 
value  as  such  in  proportion  to  the  value  that  it  produces, 
does  not,  as  has  already  been  noted,  appear  greatly  to  help 
the  case. 

But  later,  this  doctrine  receives  a  supplement  which 
may  perhaps  suffice  to  save  it ;  agents  of  production  do  not 
get  their  value  directly  from  the  product,  but  as  agents  to 
be  combined  with  entrepreneur  activity,  and  to  function 
with  it  and  under  the  hire  of  it,  in  the  production  of  value; 
their  remuneration,  therefore,  is  not  precisely  the  market 
value  of  their  product,  even  if,  as  Say  believes,  this  be,  with 
accuracy,  separately  ascertainable,  but  is  merely  the  market 
value  of  their  co-operation  in  value  production — a  quite 
distinguishable  thing : 

Whoever  controls  labor  or  land  or  capital  is  a  merchant  of  that 

commodity  which  we  call  a  productive  service Entrepreneurs 

[note  the  term]  are  nothing  but  intermediaries  who,  according  to  the 
demand  there  is  for  a  product,  bid  for  the  productive  services 
necessary  for  the  making  of  it.  By  comparing  the  prices  with  the 
costs  necessary  to  the  production  of  this  or  that  product,  entre- 
preneurs decide  to  produce  this  or  that  product,  and  establish  the 
demand  for  all  productive  services,  and,  on  the  demand  side, 
furnish  the  basis  for  arriving  at  the  market  value  of  these  services. 

The  quantity  of  services  ofifered  is  the  supply  basis  for 
this  value. ^^ 

Sympathetically  interpreted,  nothing  quite  so  modern  as 
this  is  to  be  found  in  any  of  the  modern  books :  no  doubt, 
however,  this  sympathetic  interpretation  reads  into  Say's 
doctrine  more  than  he  himself  saw  in  it;  his  explanation  of 
the  value  of  the  agent  really  errs  in  being  over-direct — in 
making  the  value  of  the  agent  to  be  in  theoretically  strict 
proportion  to  the  value  of  the  product.  Still,  he  does  not 
precisely  say  this ;  according  to  him,  the  different  distribu- 
tive shares,  however  received — whether  directly  from  pro- 
duction, or  as  hire-paid,  daily  or  weekly,  or  yearly,  and 
whether  wages  or  rent  or  interest — are  derived  through  the 
entrepreneur,    "but    in    whatever    manner    this    revenue    is 

"  Op.  cit.,  p.  372. 


Ii6  VALUE  AND  DISTRIBUTION 

received,  it  is  always  in  the  same  right,  and  its  source  is 
always  a  produced  value:"  in  objection  to  which,  or  in 
amendment  of  which  in  point  of  possible  ambiguity,  it  is 
to  be  remarked  that  when  a  remuneration  is  received 
through  an  entrepreneur,  there  is  no  knowing  precisely 
what  the  value  product  of  the  agent  is ;  and  were  this  know- 
able,  there  is  no  theoretical  warrant  for  believing  that  the 
remuneration  will  equal  the  product  or  be  proportional 
to  it.     (See  below,  chap,  xxii.) 

Say's  doctrine  of  rent  also  reads  like  some  chapter  out 
of  the  latest  of  modern  thought:  Whether  land  be  good 
or  bad,  its  annual  revenue  will  be  the  same  ratio  to  its  total 
value, — say  the  twentieth;  this  rent  may  be  expressed  as  a 
per  cent,  or  as  a  per-acre  quantity,  and  it  is  in  the  latter 
sense  only  that  good  land  may  command  rent  a  hundred 
times  greater  than  poor  land.  "Comparing  the  value  of 
the  product  with  the  sale  price  gives  the  rent  of  the  land, 
and  the  rent  of  good  land  cannot  be  higher  than  the  rent 
of  poor  land"   (in  this  sense  of  ratio). ^^ 

We  must  note,  however,  that  this  perfect  equality  of 
ratio  between  the  total  value  of  different  lands  and  the 
term  value  productivity  of  these  respective  lands  assumes, 
not  merely  the  distinguishability  and  separate  appraisability 
of  the  product,  but  also  a  perfect  homogeneity  in  the  quality 
of  the  cultivators.     Were  these  all  alike  in  preferences  and 

"  Op.  cit.,  p.  433. 

This  paragraph  is  so  important  as  to  call  for  the  author's  precise 
words:  "En  comparant  un  bon  terrain  avec  ce  qu'il  coute,  on  pour- 
rait  croire  qu'il  ne  rapporte  pas  plus  qu'un  mauvais  ;  et,  en  effot  un 
arpent  dont  on  retire  cent  francs  et  qui  coiite  d'achat  trois  mille 
francs,  ne  rapport  pas  plus  qu'un  arpent  dont  on  retire  seulement  dix 
francs  et  qui  ne  coiite  que  trois  cent  francs.  Dans  I'un  et  I'autre  cas, 
la  terre  rend  a  son  proprietaire,  chaque  annee,  le  trentienie  de  sa 
valeur.  Mais  qui  ne  voit  que  c'est  le  produit  annuel  qui  a  eleve  la 
valeur  du  fonds  ?  La  valeur  du  produit  compare  avec  le  prix  d'achat 
fait  la  rente  de  la  terre,  et  la  rente  d'une  bonne  terre  peut  n'etre  pas 
superieure  a  la  rente  d'une  terre  mediocre  ;  tandis  que  le  profit 
fonder  est  la  valeur  du  produit  annuel  compare  avec  I'etendue  du  ter- 
rain :  et  c'est  sous  ce  rapport  que  le  profit  que  rend  un  arpet  de  bon 
terrain  peut  etre  cent  fois  superieur  a  celui  d'un  mauvais." 

This,  it  will  be  noted,  is  the  view  in  support  of  which  Professor 
Fetter  has  marshaled  all  the  resources  of  wide  historical  research  and 
of  keen  theoretical  analysis.  It  may  now  be  hoped  that  this  truth, 
having  so  long  awaited  its  second  statement,  may,  in  its  later  and  more 
scholarly  presentation,  have  the  good  fortune  not  to  be  again  forgotten. 


EARLY  UTILITY  THEORY:  SAY  H? 

aptitudes  and  in  cleverness  of  bargaining,  or  were  all  land 
alike  in  point  of  adaptation  to  varying  methods,  e.  g.,  to 
intensive  and  extensive  methods  of  cultivation,  and  alike 
also  in  adaptation  to  the  varying  preferences,  tastes,  aspira- 
tions, and  skill  of  the  cultivators,  the  proportion  would, 
truly,  be  a  constant  between  the  market  value  of  the  agent 
and' its  value  productivity.  With  facts  as  they  are,  this  pro- 
portion can  be  asserted  only  between  the  market  value  of  the 
land  and  the  market  value  of  its  value  productivity; 
this  last  proportion,  however,  means  nothing  for  the 
present  purpose,  since  the  market  value  of  the  rent-bearer  is 
nothing  but  the  capitalization  of  the  prospective  rentals 
according  to  the  current  market  rate  for  such  invest- 
ments. 

Savings  and  capital  applied  to  the  land  become  part  of  it;  ...  . 
they  lose  the  nature  of  capital  and  become  land  funds.^" 

One  part  of  the  national  capital  is  diminished  to  the 
corresponding  increase  of  another  part.  It  is  thus  evident 
that  Say  cannot  possibly  concur  in  Ricardo's  notion  of  the 
relation  of  rent  to  cost  and  to  value.  Ricardo  arrived  at  his 
labor-proportion  doctrine  of  value,  first,  by  reducing  capital 
to  labor  and,  second,  by  excluding  rent  from  the  computation 
— that  is,  by  placing  value  fixation  at  the  land  margin. 
It  is  probable  that  this  service  to  the  labor-cost  doctrine  was 
all  or  nearly  all  that,  in  Ricardo's  mind,  these  tributary 
doctrines  were  ever  good  for.  Recalling,  however,  that  the 
labor-proportion  theory  was  worked  out  by  him  through 
the  entrepreneur  mechanism,  the  notion  becomes  untenable 
that  as  a  problem  in  entrepreneur  cost  the  expense  of  pro- 
duction is  greater  upon  marginal  land  than  upon  other 
land,  or  that  as  a  question  of  entrepreneurship — of  the 
personal  margin  as  against  the  instrument  or  agent  margin 
— the  marginal  cultivator  is  more  likely  to  be  upon  mar- 
ginal than  upon  other  land.  The  question  is,  therefore, 
ultimately — and  we  have  finally  arrived  at  it — whether  in 
the  cost  investigation  we  are  concerned  with  social  labor- 
purchase  cost  as  against  competitive  entrepreneur  cost,  or 
with  agent  and  instrument  margins  as  against  that  marginal 
entrepreneur  in  whose  processes  of  choice  all  agents  and 
instruments,  marginal  or  other,  are  mere  data.  And  finally 
— but  as  less  difficult — there  is  the  problem  whether,  upon 
a  value  basis,  marginal  land  or  marginal  capital  or  marginal 

'"Op.  cit.,  p.  435. 


Ii8  VALUE  AND  DISTRIBUTION 

labor  can  mean  anything  more  than  valueless  land,  valueless 
capital,  or  valueless  labor — the  equivalents  of  free  land, 
free  capital,  and  free  labor — economically,  that  is  to  say, 
no  land,  no  capital,  no  labor. 

At  any  rate,  it  is  clear  that  the  argument  that  the  rent 
of  better  land  does  not  enter  into  cost  of  production,  since, 
for  whatever  more  is  advanced  as  rent,  there  is  a  corre- 
sponding increase  of  product,  would  equally  well  apply  to 
exclude  wages  or  interest  from  cost. 

As  we  have  seen,  there  is  never,  in  the  crucible  of  entre- 
preneurship,  any  accurate  correspondence  between  the  out- 
lays of  different  entrepreneurs  and  the  addition  to  product; 
in  truth,  the  varying  proportions  in  which  different  entre- 
preneurs employ  the  different  productive  agents  should 
suffice  as  proof  of  this ;  but  for  the  purposes  in  hand  this 
need  not  be  insisted  upon.  Rent  as  a  differential  of  price 
paid  for  a  differential  of  service  is,  as  cost,  not  distinguish- 
able from  wages  or  interest. 

Ricardo  ....  shows  that  the  rent  is  not  the  cause  but  the 
effect  of  the  need  felt  for  wheat;  and  the  reasons  which  he  adduces 
will  serve  to  prove  against  him  that  the  other  expenses  of  pro- 
duction, notably  the  wages  of  labor,  are  likewise  not  the  cause  but 
the  effect  of  the  current  price  of  the  product.^^ 

And  in  summary  Say  remarks : 

The  ideas  of  David  Ricardo  have  been  of  service  to  me  in  cor- 
recting several  parts  of  this  treatise,  principally  in  what  has  rela- 
tion to  money ;  but  he  has  supplied  me  with  no  single  improvement 
to  introduce  in  that  which  relates  to  rents   (profits  fanciers).''' 

Verily  Say  w^as  a  modern  of  the  moderns. 

"  Say,  op.  cit.,  p.  438,  note. 

^Ibid.,  p.  438. 

Malthas :  Despite  marked  shrewdness  of  observation  and  great 
originality  of  insight,  Malthus'  muddle-headed'  quality  in  theoretical 
thinking  leaves  not  much  to  be  had  from  him  for  value  doctrine. 
Bearing  in  mind  that  the  purpose  of  the  work  in  hand  is  constructive 
rather  than  primarily  historical  or  critical,  and  therefore  does  not  con- 
cern itself  with  tracing  the  growth  of  theory,  or  with  outlining  the 
systems  of  thought  of  different  writers,  excepting  to  the  extent  that — 
as  a  method  of  presentation  and  mostly  irrespective  of  the  personal  or 
systematic  interest,  as  such — these  different  positions  may,  illustratively 
or  by  statement  and  criticism,  be  made  to  serve  the  purposes  of  expo- 
sition, we  shall  decide  that  the  views  of  Malthus  need  not  long 
detain  us. 

As  has  been  already  noted,  he  was  by  full  and  frank  profession, 
a  disciple  of  the  labor  theory  of  value — ^but  all  the  while  with   some 


EARLY  UTILITY  THEORY:  SAY  119 

misgivings  and  with  some  reservations.  For  even  though,  causally 
speaking,  labor  was  admittedly  the  determinant  of  value,  yet,  as  a 
question  of  exchange  power,  of  relations  between  commodities,  and 
as  a  problem  of  the  choice  of  a  value  measure,  it  appeared  to  him  much 
more  relevant  to  ask  how  much  a  commodity  will  command  of  labor 
wherewith  to  produce  more  commodities,  than  to  inquire  into  the  quantity 
of  labor  invested  some  time  in  the  past  in  its  production.  And  so 
Malthus  stood  for  the  labor  measure  of  value,  but  this  in  terms  of 
labor  purchasable  instead  of  labor  expended,  and  with  the  emphasis 
upon  service  in  terms  of  labor  spared  to  the  purchaser  or  of  the 
service  offered  through  the  purchased  goods. 

In  Malthus'  controversy  with  James  Mill  as  to  the  possibility  of 
a  general  glut,  this  same  issue  is  in  the  background  and  takes  a  position 
of  controlling  importance.  In  that  controversy  Malthus  restates  the 
issue  as  substantially  whether  commodities  in  general  may  be  selling 
at  less  than  their  costs  of  production.  His  argument  (Definitions  in 
Political  Economy,  London,  John!  Murray,  1827,  pp.  44  flf.)  pro- 
ceeds upon  distinctly  entrepreneur  cost  lines,  regards  rent  payments 
as,  for  purposes  of  cost,  precisely  like  other  outlays,  and  finds  the  prac- 
tical test,  for  that  practical  man  who  is  trying  to  decide  whether  the 
market  is  overdone,  to  be  in  the  equality  of  money  intake  with  money 
outgo  :  "The  hop  planter  who  takes  a  hundred  bags  of  hops  to  Wig- 
hill  fair,  thinks  little  more  about  the  supply  of  hats  and  shoes  than 
he  does  about  the  spots  on  the  sun.  What  does  he  think  about,  then  ? 
And  what  does  he  want  to  exchange  his  hops  for  ?  Mr.  Mill  seems  to  be 
of  opinion  that  it  would  show  great  ignorance  of  political  economy  to 
say  that  what  he  wants  is  money ;  yet  ....  it  really  is  money 
which  he  wants  and  ....  this  money  he  must  obtain,  in  the  present 
state  of  society,  in  exchange  for  the  great  mass  of  what  he  has  brought 
to  market,  or  he  will  be  unable  to  carry  on  his  business  as  a  hop- 
planter  ;    ....   he   must   pay   the   rent   of   his   hop   ground   in   money 

[this  being  presumbaly  so  fixed  by  agreement] He  must  pay 

for   his   poles,    his   bags,    his    implements,    etc.,    in   money He 

must  pay  the  ....  laborers  which  he  employs  upon  his  grounds, 
during  the  course  of  the  next  year,  in  money,  and  ....  it  is  in 
money  alone  of  all  the  articles  brought  to  the  fair,  that  he  can  calcu- 
late    his     profits True,   ....   the     landlords     and     laborers 

who  are  paid  in  money  will  finally  exchange  it  for  something  else,  as 
no  one  enjoys  money  in  kind  except  the  miser:  but  the  landlord  .... 
would  be  little  likely  to  accept  from  the  hop-planter  the  articles  which 

he   could   get   at   the    fair    in    exchange   for   his   hops And    as 

matter  of  fact,  the  laborer  ....  is  paid  in  money.  Foreign  trade  is 
no  doubt  mainly  a  trade  of  barter.  But  the  question  whether  British 
woolens  find  an  adequate  market  in  the  United  States  does  not  depend 
upon  their  purchasing  the  same  quantity  of  tobacco  as  usual,  but  upon 
whether  the  tobacco,  or  whatever  the  return  may  be,  will  purchase  the 
British  money  or  the  British  labor  necessary  to  enable  the  woolen 
manufacturer  to  carry  on  his  business  successfully.  If  both  woolen 
manufacturers  and  tobacco  are  below  the  cost  of  production  in  money 

or    labor,    both    parties    may    be    carrying    on    a    losing    trade 

This  is  the  answer  to  the  pamphlet  which  Mr.  M.  Say  addressed  to  me 

several  years  ago The  power  of  replacing  capital  will  mainly 

depend   on    the   power   of  commanding   labor Commodities    in 

general,  and  corn  most  particularly,  are  continually  rising  or  falling  in 
money    price   ....   while    the    money    price    of   labor    remains    much 


I20  VALUE  AND  DISTRIBUTION 

more    nearly    the    same What    are    the    costs    of    production? 

They    are    either    the    amount    of    money    necessary    to    pay    the    labor 

worked  up   in  the  commodity,   and  in  the  tools,    etc with   the 

ordinary  profit,  etc or  they  are  the  quantity  of  labor  in  kind, 

etc Now    surely,    it    cannot    be    denied    theoretically,    that    all 

commodities  produced  in  this  country  may  fall  in  comparison  with  a 
commodity  produced  in  Mexico.  As  little  can  it  be  denied,  theo- 
retically, that  all  commodities  produced  by  British  labor  may  fall  as 
compared  with  that  labor." 

From  another  point  of  view,  and  for  other  purposes,  Malthus' 
doctrine  of  a  general  glut  will  later  occupy  us  further.  For  the 
present,  the  sole  concern  is  to  make  clear  the  distinction,  as  it  lay  in 
Malthus'  mind,  between  labor  as  the  cause  of  value  and  labor  as  the 
measure  of  value — and  particularly  to  make  it  clear  that  this  labor- 
purchase  notion,  this  forward-  rather  than  backward-looking  view,  is  a 
groping  effort  toward  utility  rather  than  cost  as  the  basis  of  value. 
The  value  of  the  goods  is  taken  to  rest  rather  upon  the  service  to  be 
obtained  from  the  goods  than  upon  the  labor  expended  in  their 
production. 


CHAPTER  X 
THE  CAPITAL  CONCEPT 

Precisely  why  the  distrihiiendmn  in  society  should  be 
taken  to  be  the  produce  annually  to  be  divided,  as  against  a 
weekly  or  monthly  or  decennial  division,  is  not  clear ;  but  it 
is  clear  that  unless  the  distributive  process  is  conceived  as 
carried  on  concurrently  with  the  productive  process,  there  is 
no  reason  why  the  annual  term  is  not  as  serviceable  as  any 
other. 

We  are  nOt  yet  ready  for  a  full  consideration  of  the 
notion  and  nature  of  the  social  dividend;^  broadly,  how- 
ever, it  may  be  taken  to  indicate  the  aggregate  social  output 
of  consumption  goods — commodities,  benefits,  enjoyments — 
all  things,  in  short,  accruing  to  men  as  economic  income,  in 
any  given  unit  of  time.  It  is,  indeed,  sufficiently  difficult  to 
make  precise  the  content  and  limitations  of  this  social-divi- 
dend concept  and  of  the  distributive-income  concept;  and  it 
may  be  inexpedient  to  attempt  here  even  to  place  the  inter- 
rogation points.  If  the  textile  worker  makes  you  a  suiting, 
and  the  tailor  makes  this  into  a  suit,  no  one  would  question 
that  both  the  making  of  the  cloth  and  the  making-up  of  it 
into  a  suit  are  services — items  contributing  to  your  real 
income.  But  how  if  you  make  your  own  cloth?  or  mend 
your  own  coat?  These  also  are  facts  of  income,  results 
enjoyed,  but  are  they  thereby  the  subject-matter  of  the  dis- 
tributive process?  Are  they  parts  of  the  social  dividend  for 
any  purposes  of  theoretical  analysis  or  of  the  practical 
applications  of  doctrine?  Are  you  a  producer  when  you 
cook  your  own  food  ?  The  restaurant-keeper  and  the  board- 
ing-house mistress  render  utilities  of  a  highly  important 
order;  their  activities  are  productive,  and  the  products 
thereof  are  parts  of  the  great  distribuendum.  So  the  house 
servant    and    the    house    cook    are    likewise    productive 

*  See  chap.  xxvi. 


122  VALUE  AND  DISTRIBUTION 

of  distributed  utilities — goods  of  attention,  conven- 
ience, comfort,  or  show,  as  well  as  of  cleanliness, 
palatability,  and  digestibility.  It  is,  then,  inadmissible 
to  deny  productivity  to  the  housewife  equally  with 
the  bread-winner;  house-bound  women  are  something 
more  than  supervisors  and  directors  of  the  consumption 
process ;  they  are  producers.  But,  even  so,  does  this  avail 
to  include  their  products  within  the  goods  which  get  dis- 
tributed? Or  is  there  a  line  of  distinction  between  pro- 
duced goods  and  distributed  goods,  accordingly  as  these 
goods  do  or  do  not  go  through  the  crucible  of  market  valua- 
tion? And  if  this  be  the  dividing  line,  must  not  the  home- 
grown and  home-consumed  eggs  and  chickens  and  pork  of 
the  farmer  be  set  outside  the  distributive  problem  merely 
because  they  never  reach  the  market? 

And  this  is  not  the  only  difificulty,  nor  is  it,  for  theo- 
retical purposes,  the  most  perplexing  difficulty.  A  goodly 
part  of  each  man's  purchasing  power  is  expended  in  the 
direction  of  services,  in  the  more  limited  sense  of  goods 
not  fixed  and  embodied  in  matter.^     One  pays  to  be  cured 

-  No  one  will  today  deny  the  productivity  of  the  preacher  or 
singer  or  actor ;  nor  is  today  the  distinction  between  material  and 
immaterial  of  great  significance  anywhere  for  economic  science — 
quite  irrespective  of  the  long-standing  but  lately  much-litigated  prob- 
lem as  to  the  philosophical  justification  for  any  such  distinction.  It  is 
well,  however,  to  appreciate  the  aspect  in  which  the  question  appealed 
to  the  earlier  economists. 

Mercantilist  thought  had,  it  is  true,  abandoned  the  cameralistic 
point  of  view,  according  to  which  all  economic  inquiry  regarded  solely 
the  prince's  welfare  in  the  administration  of  his  private  estate — the 
ends  proposed  being  simply  the  maximum  possible  revenue  and  the 
highest  level  of  dynastic  prosperity. 

But  Mercantilism  was  none  the  less  consistently  national  in  its 
point  of  view,  as  distinguished  from  individualistic  and  personal  ;  and 
it  was  competitively  national  as  distinguished  from  social  or  cosmo- 
politan. How,  indeed,  shall  any  people  grow  in  economic  power  as 
against  its  neighboring  enemies?  by  piling  up  wealth,  by  goodly  accu- 
mulations of  munitions  and  moneys  and  credits  against  the  time  of  con- 
flict. And  how  shall  any  man  or  nation  become  wealthy,  except  by  sell- 
ing more  than  is  bought  in,  by  keeping  consumption  under  production? 
And  how  so  well  extend  your  personal  economic  dominion  over  your 
neighbor  and  over  your  neighbor's  possessions— his  desirable  daughter 
included — as  by  getting  him  into  debt  to  you?  Or  how  so  well  render 
yourself  strong,  and  at  the  same  time  your  competitor  nation  weak,  as  by 
getting   it    into    debt    to    you,    or   better   yet,   by   getting   its    purchasing 


THE  CAPITAL  CONCEPT  123 

of  his  ills,  or  of  his  ennui,  to  be  passively  exercised  by  the 
masseur,  to  be  solaced  by  the  ministrations  of  the  pianist, 
the  vocalist,  and  the  elocutionist.  Instead  of  our  looking  at 
pictures,  the  orator  or  the  actor  paints  pictures  in  our 
minds.  But  suppose  one  plays  the  violin,  not  for  another's, 
but  for  his  own  enjoyment,  and  without  monetary  recom- 
pense; or  provides  his  own  exercise,  paints  revery-wise  his 
own  dream  pictures,  cures  his  own  ills,  basks  in  the  sun  to 
his  own  great  warmth  and  enjoyment,  and,  in  general,  has 
a  good  time;  once  again,  is  all  of  this  production?  Or,  if 
not,  is  the  basis  of  the  distinction  that  these  activities  or 
passivities  fail  of  getting  valued  in  the  market?  Or  is  it 
rather  that  they  are  entirely  internal  ?  Or  is  it  that  they  are 
free  goods  to  be  had  without  any  sort  of  sacrifice,  by  play 
rather  than  by  work?  In  truth,  we  are  again  in  face  of  the 
difificulty  of  defining  play.  Is  the  essential  characteristic  of 
it  in  its  non-productivity,  or  rather  in  its  non-sacrifice  char- 
acter, the  free-goods  quality  of  its  product?  In  fine,  what, 
accurately,  do  we  mean  by  production? 

Putting  aside   for  the  time   being  these  more   or   less 

power  into  your  own  control,  through  cornering  its  medium 
of  exchange?  And  how  accomplish  all  or  any  of  these  things 
unless  by  selling  your  victim  neighbor  or  nation  more  than 
you  buy  back?  Thus  conceived,  with  the  nationalistic  emphasis, 
the  whole  question  becomes  not  primarily  one  of  income, 
or  of  aggregate  satisfactions  and  total  consumption,  but  of  accumula- 
tion, and  especially  of  growth  in  wealth  under  the  form  of  foreign 
credits    or    other    ready    international    purchasing   power. 

Proceeding  from  substantially  the  same  point  of  view,  the  physio- 
cratic  school  seemed  to  itself  to  have  discovered  a  method  better 
yet — accumulation  truly,  but  accumulation  rather  of  population  than  of 
wealth.  Artisans  consumed  as  much  wealth  as  they  produced ;  the 
social  cost  of  their  product  was  as  great  as  their  product.  Manu- 
facturers were  regarded  as,  in  Dr.  Franklin's  phrase,  "subsistence  meta- 
morphosed." Agricultural  laborers  also  consumed  all  that  they 
produced  or,  at  all  events,  all  that  they  received  in  wages,  and  seemingly 
must  always  command  so  small  a  wage  as  to  make  this  a  permanent 
fact ;  whatever  the  product  of  labor  and  land  together  might  be,  the 
excess  in  produce  over  the  laborers'  wage  and  necessary  subsistence 
must  go  to  the  landowner  as  the  equivalent  and  expression  of  the  pro- 
ductiveness of  the  land.  So  with  agricultural,  also,  as  with  artisan 
labor,  the  social  cost  canceled  the  social  product ;  only  the  land  was 
productive  of  net  product.  But  even  so,  there  was  this  difference 
between  artisan  labor  and  agricultural  labor,  that  artisan  labor  did  not 
increase  the  total  population  maintainable  in  the  country,  gave  forth  no 


124  VALUE  AND  DISTRIBUTION 

gratuitous  difficulties,  it  may  be  said  that  economic  com- 
modities— products  for  economic  purposes — are  restricted 
to  those  desirable  things  which  are  not  free.  But  especially 
is  it  to  our  present  purposes  to  note  that  this  is  not  quite  the 
same  thing  as  a  restriction  to  those  facts  produced  by  labor 
or  attainable  only  through  labor.  For  there  is  much  value 
no  part  of  which,  or  but  a  small  part  of  which,  is  labor-pro- 
duced; and  some  of  it  is  not  labor-wise  obtainable.  The 
productivity  of  what  is  broadly  called  land  manifests  itself 
in  part  in  values  of  this  sort  based  upon  qualities  of  origi- 
nal fertility,  or  upon  non-produced  facts  like  scenery,  loca- 
tion, springs,  mines,  water-powers.  It  is  the  fact  of  limited 
supply  of  products  and  of  their  value  standing  derivative 
from  this  limitation,  rather  than  of  mere  labor  origin  or 
labor  limitation,  that  gives  any  agent  or  instrument  its 
right  to  claim  productivity  for  itself;  environment  is  as 
truly  productive  as  is  organism. 

Utility  and  the  necessity  of  sacrifice  for  its  enjoyment 
appear,  then,  to  be  the  only  requisites  of  value.   All  valuable 

subsistence  product,  no  life  material,  while  the  product  of  agriculture 
may  be  regarded  as  population,  expressed  in  the  form  of  its  raw 
material.  And  it  seemed  clear  that  national  supremacy  was  rather  a 
question  of  population  than  of  accrued  wealth. 

It  follows  also  that,  inasmuch  as  the  laborer  received  only 
enough  to  live  upon  anyway,  there  was  small  use,  and  some  harm,  in 
trying  to  tax  him  ;  the  only  man  who,  having  a  product  net,  a  surplus, 
could  pay,  was  the  landlord,  the  rent-gatherer ;  if  the  laborers  paid 
taxes,  it  must  be  at  the  expense  of  their  number.  It  followed  from 
all  this,  then,  that  the  program  fundamental  to  national  greatness  was 
to  foster  agriculture  as  a  life-maintainer,  the  sole  source  of  increasing 
population,  and  to  tax  the  land, 

Adam  Smith,  coming  into  the  national  point  of  view  as  an  inherit- 
ance from  earlier  thought,  set  himself  deliberately  to  the  investigation 
of  the  causes,  and  to  the  formulation  of  the  rules,  making  for  the 
increase  of  the  opulence  of  nations,  and  found  that  while  manu- 
factures were  productive,  they  were  not  so  in  the  same  sense  as  agri- 
ciilfure,  while  labor  as  mere  service  was  not  productive  at  all.  The 
shadow  of  physiocratic  reasoning  was  still  over  Adam  Smith. 

Not  having  arrived  fully  and  consistently  at  the  individual  point 
of  view  in  economic  analysis,  John  Stuart  Mill  followed  substantially  in 
the  footsteps  of  Adam  Smith :  Unproductive  consumption  is  con- 
sumption that  does  not  furnish  maintenance  for  productive  labor ; 
productive  labor  is,  in  turn,  that  labor  which  affords  an  addition  to  the 
aggregate  accumulated  wealth  possessions  of  society  ;  thereby  he  arrived 
at  the  distinction  between  material  and  immaterial.     But  this  distinction 


THE  CAPITAL  CONCEPT  125 

consumption  goods  are  products  either  of  labor  or  of 
environment;  and  the  problem  of  distribution  has  ulti- 
mately to  do  only  with  consumption  goods. 

If  all  consumption  goods  are  products,  it  remains  to  ask 
of  what  they  are  the  products ;  and  how  many  are  the 
factors  of  production,  through  which  contribution  is  made 
to  the  supply  of  things,  facts,  and  conditions  possessing 
value  ? 

It  is  to  be  kept  carefully  in  mind  that  even  though  the 
question  is  stated  as  one  of  the  factors  making  for  value 
product,  this  search  for  factors  is  none  the  less  a  search 
for  the  objectively  existing  facts,  means,  intermediaries, 
and  instruments,  conditioning  the  existence  of  the  value 
product,  and  standing,  with  reference  to  the  product-result, 
in  a  physical-causal  relation  as  the  first  term  in  the  force- 
cause  sequence.  That  is  to  say,  the  point  of  view  and 
method  of  approach  are,  in  the  more  inclusive  sense  of  the 
terms,  mechanical  and  technological  in  significance.  Surely 
in  a  sense,  hut  in  a  quite  different  sense,  monopolies,  patents, 
good-will,   trade-marks,   etc.,   are   productive ;   incomes   go 

between  material  and  immaterial  rested  not  at  all  upon  considerations 
of  utility,  of  importance  for  consumption,  in  the  aspect  of  service  to 
human  needs,  nor  finally  and  fundamentally  upon  some  test  of  con- 
crete reality,  or  of  tangibility,  or  of  materiality  in  any  philosophical 
sense,  but  solely  upon  the  aspect  of  permanency.  For  in  a  general' 
way,  that  which  is  material  and  tangible  is  enduring  ;  at  any  rate,  that 
which  is  not  material,  which  has  no  substantiality,  is  evanescent ;  in 
coming  to  be  it  ceases  to  be.  Thus  only  material  things  can  add  to 
national  wealth.  And  that  some  forms  of  material  wealth  are  them- 
selves very  temporary  in  their  existence,  e.  g.,  ice  cream,  leaves  the 
line  between  the  material  and  the  immaterial  none  the  less  an  actual 
line  and,  at  the  same  time,  a  line  which  coincides  practically  with  the 
line  between  the  things  that  add  to  national  accumulated  riches  and  the 
things  that  do  not. 

All  of  which  was  excellent  for  its  purpose,  and  need  have  occa- 
sioned no  perplexity  or  controversy,  if  only  Mill  had  not  fallen  into 
the  error  of  following  his  predecessors  in  their  bad  choice  of  terms ; 
for  the  line  which  he  was  really  seeking  was  not  that  between  the  pro- 
ductive and  the  non-productive,  or  between  the  material  and  the  imma- 
terial, or  between  the  tangible  and  the  intangible,  but  merely  the  line 
between  the  accumulatable  and  the  non-accumulatable.  Interpreting  his 
terms  productive  and  non-productive  in  this  sense,  no  difficulty  is  pre- 
sented, excepting,  perhaps,  with  regard  to  the  significance  of  the  dis- 
tinction, as  seen  from  the  point  of  view  of  a  more  modern  analysis  and 
of  its  theoretical  needs. 


126  VALUE  AND  DISTRIBUTION 

with  them,  they  are  capitaHzed  into  market  values,  and  are 
sold  in  the  investment  markets ;  that  is,  they  are  acquisitively 
productive  for  the  purposes  of  private  interests  and  of  indi- 
vidual ownership ;  they  are,  in  fact,  differential  opportuni- 
ties reduced  to  private  property,  and  enjoyed,  as  is  the 
essential  fact  of  private  property,  under  the  right  of  exclu- 
sion of  all  other  claimants.  These  property  rights,  many  of 
them  purely  distributive  in  ultimate  bearing,  are  neverthe- 
less not  readily  distinguishable,  excepting  upon  technologi- 
cal grounds,  from  ownership  in  lands  or  other  rentable  and 
productive  instrumental  goods. 

But  conceiving  of  the  productive  process  technologically, 
what  different  productive  categories  demand  recognition? 

The  fundamental  distinction  would  seem  to  be  that 
between  man,  as  agent-laborer  and  producer,  as  over  against 
the  aids,  auxiliaries,  and  instruments  employed  by  him.  This 
parallels  the  distinction  between  organism  and  environ- 
ment, and  corresponds  accurately  with  the  nature  of  income 
as  received  (i)  by  virtue  of  personal  activities,  and  (2)  as 
derivative  from  possessions. 

Accepting,  for  the  time  being  without  question,  this 
first  category,  that  of  the  human  actor  manifesting  himself 
in  economic  production  under  the  aspect  of  human  labor, 
we  turn  to  inquire  whether  the  aggregate  of  productive 
possessions  is  to  be  further  distributed  into  the  prevailing 
land  and  capital  categories,  and,  if  so,  whether  the  distinc- 
tion between  land  and  capital  is  to  be  rested  solely  upon 
their  different  relations  to  the  technology  of  industrial  pro- 
cesses, or  is  to  be  justified  under  some  further  and  different 
principle. 

Waiving  for  the  present  the  question  whether,  as  factors 
of  production,  any  distinction  other  than  technological  is 
admissible,  we  confine  our  inquiry  to  the  validity  of  the  dis- 
tinction as  based  solely  upon  technological  considerations. 
For  technological  purposes,  then,  is  land  weath  to  be  dis- 
tinguished from  other  weath  ? 


THE  CAPITAL  CONCEPT  127 

The  extractive  industries — the  industries  of  raw  ma- 
terial, the  industries  primary  and  basic  in  human  life — 
depend  upon  the  land,  land  in  this  sense  being,  of  course, 
taken  to  include  seas  and  rivers  and  mines.  This  distinction 
between  extractive,  or  primary,  and  industrial,  or  secondary, 
coincides  for  the  most  part  with  the  distinction  between 
agriculture  and  manufactures,  and  is  doubtless  of  very  con- 
siderable significance  for  certain  purposes.  But  it  evi- 
dently will  not  serve  as  a  basis  for  a  distinction  between 
land  wealth  and  other  wealth,  since  not  the  extractive  indus- 
tries alone,  but  all  industries,  employ  land ;  and  since  all 
extractive  industries  make,  under  present  conditions,  use  of 
capital.  Even  as  a  distinction  of  degree  it  will  not  hold ; 
some  of  the  extractive  industries,  mining  for  example,  are 
pronouncedly,  even  prevailingly,  capital-using  in  their  tech- 
nique: and  even  the  most  simple  and  primitive  of  extractive 
employments  make  appreciable  use  of  non-land  instru- 
ments. 

It  is,  however,  none  the  less  true  that  not  merely  food 
and  raw  material,  but  building-sites,  standing-room,  air, 
climate,  scenery,  neighborhood,  etc.,  are  markedly  and  em- 
phatically of  land  character  or  of  land  origin.  And  it  is 
equally  unquestionable  that  capital  goods  achieve  some 
things  not  attainable  through  any  possible  substitute,  pre- 
cisely as  other  commodities  are  in  a  peculiar  degree,  or  exclu- 
sively, dependent  on  labor.  You  cannot  have  timber  from 
labor  or  capital;  neither  land  nor  capital  will  dance  you  a 
skirt  dance ;  and  if  you  desire  a  certain  peculiar  quality  of 
screeching,  you  must  resort  to  a  phonograph  or  to  a  calliope 
as  against  any  form  of  land  or  labor. 

But  note  once  again  how  purely  technological  all  of 
this  is;  for  while  it  is  true  that  labor  and  capital,  when 
denied  recourse  to  land  in  the  non-value  and  purely  con- 
crete and  physical  sense,  will  yield  no  timber,  it  is  at  the 
same  time  true  that  they  will  give  timber  plenti- 
fully enough  if  strictly  limited  in  their  application  to 
valueless  land,  that  is,  if  confined  to  what,  in  the  economic 


128  VALUE  AND  DISTRIBUTION 

and  value  sense,  is  no-land.  And  some  day  the  technology 
of  timber  production  may  make  of  timber  a  laboratory 
product. 

And  it  is  all  the  while  to  be  remembered  that  these  tech- 
nological differences  and  specializations,  while  of  unques- 
tionable actuality,  are,  in  fact,  as  marked  between  one  item 
of  land  and  another,  or  between  one  item  of  capital  goods 
and  another,  or  between  one  laborer  and  another,  as  between 
capital  goods  and  labor,  labor  and  land,  or  land  and  capital. 
For  market  purposes  agricultural  machinery  is  more  closely 
akin  to  wheat  land  than  to  machinery  for  watch  or  chro- 
nometer production ;  cotton  lands  are,  from  the  same  point 
of  view,  more  like  sheep  than  like  timber  lands  or  iron 
lands,  or  wheat  lands;  in  point  of  products,  violin  and  sea 
are  not  more  unlike  than  virtuoso  and  sailor,  or  than  prima 
donna  and  stoker. 

In  truth,  also,  if  productive  factors  are  to  be  distin- 
guished according  to  technological  considerations,  not  two 
or  three  but  countless  categories  of  productive  factors  will 
have  to  be  recognized.^ 

But  in  point  of  degree  of  technological  *  specialization,  is 
this  threefold  classification  better  founded?    Capital  is,  for 

*  It  must,  however,  be  admitted  that  this  does  not  quite  cover  the 
difficulty  ;  nor  at  this  stage  of  the  discussion  is  adequate  treatment  of 
the  difficulty  readily  possible. 

For,  after  all  is  said,  it  must  remain  true  that,  technologically  con- 
sidered, as  mechanical  and  instrumental  facts,  a  broad  and  general  dis- 
tinction between  land  and  other  production  goods  will  require  recogni- 
tion. But  it  is  the  more  necessary  to  determine  the  precise  purposes 
for  which  the  distinction  is  important,  and  the  extent  and  accuracy 
with  which  the  distinction  applies.  To  perform  this  service  fully 
must,  however,  be  left  to  a  later  chapter.      (See  chap,  xxiii.) 

That  the  law  of  diminishing  returns  applies  only  to  land,  or  at  all 
events  applies  with  some  especial  force  or  in  some  peculiar  manner  to 
land,  is  a  conviction  appealing  strongly  to  careful  thinkers  as  warrant- 
ing the  distinction  between  land  and  other  instrumental  goods. 

It  is,  for  example,  clear  that  Malthus  was  right  in  insisting  that, 
as  long  as  the  human  race  must  depend  upon  agriculture  for  its  food, 


*  Etymologically  speaking,  there  are  manifest  objections  to  this 
use  of  the  term  "technological"  as  referring  especially  to  capital 
regarded  in  the  mechanical  and  industrial  sense ;  but  no  better  term 
seems  to  be  at  hand.  « 


THE  CAPITAL  CONCEPT  129 

example,  said  to  be  mobile,  not  spatially  alone,  but  in  indus- 
trial applications  in  general.  In  point  of  fact,  no  distinction 
in  this  regard,  other  than  of  degree,  has  been  anywhere 
urged   or   attempted ;   and   evidently  any   distinction   along 

so  long  population  cannot  continually  multiply  without  somewhere 
coming  upon  the  harsh  pressure  of  the  subsistence  limit.  And  it  is  true 
also  that  this  is  due  to  the  existing  limitation  upon  the  land  supply — 
elastic  limits  possibly,  but  none  the  less  real  and  permanent.  Land 
cannot  be  harder  and  harder  pushed  for  product  excepting  upon  terms 
of  less   and    less   generous   response. 

Postponing  for  a  moment  the  question  of  why  this  is,  it  is  first  to 
be  noted  that  the  fact  is  not  only  primarily  social  in  significance,  but 
is  also  a  fact  the  significance  of  which  is  purely  by  forecast  or 
prophecy.  While  the  private  and  competitive  cultivation  of  land  is 
interested  solely  in  the  value  of  the  product,  and  is  interested  in  the 
volume  of  the  product  only  as  bearing  upon  its  value,  this  Malthusian 
discussion  adopts  purely  a  social  point  of  view,  regards  the  food 
product  not  as  value  but  as  volume,  and  concerns  itself  not  with  the 
present  time,  but  with  later  centuries.  That  is  to  say,  the  law  of 
diminishing  returns  is,  for  Malthusian  purposes,  a  social  law  in  the 
dynamics  of  production,  and  a  law  having  no  concern  with  value 
problems    or    with    any    distributive    problem    present    or    future. 

Doubtless,  however,  the  botanical  or  zoological  or  agricultural  facts 
upon  which  Malthus  based  his  doctrine  in  social  dynamics  may  afford  a 
sufficient  basis  for  inferring  other  laws  for  present  problems  of  com- 
petitive activities  and  of  market  values. 

Surely  there  could  be  no  such  thing  as  land  rent,  were  there  no 
limit  upon  the  supply  of  land  ;  but  this  is  merely  to  say  that  all  value, 
whether  for  land  or  for  machines,  or  for  shoes,  or  for  hats,  exists  only 
as  dependent  upon  some  degree  of  scarcity. 

And  surely,  if,  with  any  given  piece  of  land,  increased  expenditure 
in  non-land  directions  were  not  attended  with  a  costantly  falling  com- 
pensation both  in  volume  and  in  value,  there  could  be  no  land  scarcity 
and  no  land  value.  But  this  is  equally  true  of  mowing  machines  or 
horse  rakes  :  so,  if  one  pound  of  phosphate  would  suffice  to  fertilize  a 
continent  of  land,  phosphate  would  be  safe  from  ever  becoming  dear  in 
price  ;  or  if  one  hour  of  labor  would  do  all  the  work  to  be  done,  labor 
and  its  products  could  manifest  no  rarity. 

If  the  cultivator  will  apply  all  his  outlays  to  land  only  infinitesimally 
under  the  margin — that  is,  to  land  unlimited,  rentless,  and  valueless — 
no  difficulty  will  be  experienced  in  getting  returns  proportionate  to  out- 
lays ;  in  truth,  not  in  the  value  sense  here  but  only  in  the  technological 
sense  is  land  being  cultivated  ;  as  none  is  used,  none  is  paid  for.  But 
if,  with  land  that  is  valuable,  only  the  non-land  expenses  of  production 
are  doubled,  there  must  result  less  than  a  doubled  product :  the  pro- 
duction undertaking  as  a  whole  was  not  doubled.  If  this  fact  is  all 
that  is  intended  to  be  formulated  under  the  competitive  rendering  of 
the  law  of  diminishing  returns,  the  law  must  be  pronounced  to  be 
axiomatically  valid,  but  valid  equally  for  capital  instruments  and  for 
labor  agents  in  all  their  various  combinations.     Each   case  under  the 


I30  VALUE  AND  DISTRIBUTION 

this  line  must  be  of  a  most  hazy  sort,  as  appHed  to  dis- 
tinguish, one  from  another,  land,  capital,  and  labor.  It  is, 
indeed,  true  that  capital  is  commonly  declared  to  possess 
a  mobility  far  surpassing  that  of  labor  or  of  land ;  but  capi- 

law  stands  as  mere  illustration  of  the  fact  that  if  only  a  part  of  the 
productive  factors  are  increased,  the  product  will  not  respond  with  the 
same   increase  as  if  all   the   factors  were   doubled. 

But  the  law  is  often  formulated  to  assert  that  if  the  applications 
of  expense  to  the  land  are  doubled,  but  not  the  land,  the  extra 
returns  will  fail  of  proportion  to  the  increased  expense.  And  this 
formulation  of  the  law  is  also  valid,  even  if  not  quite  axiomatic  ; 
proper  proportions  of  land  value  with  other  values  must  be  maintained, 
or  the  returns  will  be  a  disappointment ;  a  bad  combination  gives 
bad  results. 

But  this  also  all  holds  equally  for  capital  goods  and  for  labor. 
Too  much  or  too  little  of  any  productive  factor,  relatively  to  the  others, 
gives  bad  results.  So  far,  then,  nothing  has  yet  presented  itself  in  the 
field  of  current,  competitive  value  production  to  justify  any  line  of  dis- 
tinction between  land  capital  and  other  capital.  And  it  is  now  to  be 
added  that  for  most  purposes  in  production,  land,  labor,  and  capital 
may  be  used  as  substitutes  one  for  another.  Just  as  the  original 
qualities  of  the  soil  may  be  exhausted  by  withholding  of  upkeep,  so 
they  may  be  replaced  and  renewed  by  capital  expense  ;  the  poorest  of 
land  may  be  made  into  good  land,  if  only  sufficient  capital  expense  be 
applied.  And  precisely  as  machinery  may  take  the  place  of  labor,  or 
labor  of  machinery,  so  more  labor  may  often  be  hired  rather  than 
more  land  rented  or  more  machinery  purchased ;  or,  again,  more 
capital  expense  may  be  applied  to  a  given  holding  of  land  rather  than 
more  labor  hired  or  more  land  rented. 

This  is  constantly  illustrated  in  actual  farming;  one  farmer  rents 
more  land  or  better  land  and  thus,  through  his  larger  rent  outlay, 
excuses  himself  from  correspondingly  large  outlays  for  machinery  or 
fertilizers  or  labor  ;  another  farmer  finds  it  to  his  advantage  to  restrict 
himself  in  rent  outlays  and  to  extend  his  investment  in  the  direction 
of  capital  goods  or  labor. 

But  that  at  the  margin  this  principle  of  substitution  holds,  and 
even  that  transportation  activity  or  improvements  in  agricultural  tech- 
nique may  have  the  effect  either  to  increase  the  land  supply  or  to  make 
more  effective  the  existing  supply,  does  not  prove  that  the  principle 
of  substitution  is  indefinitely  applicable  at  no  matter  how  distant  removes 
from  the  margin  of  substitution  ;  for  were  such  the  truth,  there  could 
be  nowhere  any  disadvantage  from  an  increase  of  capital  expense  upon 
a  fixed  supply  of  land,  or  any  loss  from  twenty  laborers  working  with 
one  loom,  or  any  reason  why  indefinite  wagons  should  not  dispense  with 
the  need  of  horses  or  drivers. 

For  it  is  clear  that  in  the  main  the  relation  between  the  different 
production  goods  is  one  of  complementarity  and  interdependence  rather 
than  of  the  infinite  possibility  of  substitution.  More  men  and  more 
machinery  may  make  call  for  more  land  rather  than  for  less,  or  for 
the  old  land  at  a  higher  rate  of  rental.  Machinery  docs  not  displace 
men  indefinitely,  but,  under  stable  conditions  of  technique,  calls  instead 
for  men  to  fashion  or  to  tend  ;  wagons  furnish  demand  for  drivers,  ships 
for  sailors„horses  for  drivers,  drivers  for  wagons,  and  so  on  without  limit. 


THE  CAPITAL  CONCEPT  1 31 

tal  used  in  this  connection  points  to  something  distinctly 
non-technological  in  nature.  Some  of  this  capital  mani- 
fests its  quality  of  mobility  simply  because  it  is  unspecial- 
ized  in  application ;  it  is  money,  demand  credits,   funds  in 

Stopping  to  note,  however,  that  there  is  in  these  facts  no  war- 
rant for  the  threefold  division  of  productive  factors,  since  it  is 
equally  true  that  bricklayers  furnish  a  demand  for  hod-carriers,  car- 
penters for  masons,  wagons  for  horses,  sailors  for  cooks,  engines  for 
cars,  rails  for  ties,  meadow  land  for  pasture,  and  both  of  these  last  for 
timber  lands,  and  so  on  indefinitely,  we  return  to  our  postponed  ques- 
tion, why  does  the  point  always  arrive  at  which  nothing  serves  as  a 
substitute  for  more  land,^a  point,  that  is,  at  which  more  and  more 
intensive  cultivation  gives  more  and  more  meager  returns  ?  To  what 
particular  attribute  of  land  is  this  to  be  ascribed?  And,  for  that 
matter,  to  what  quality  or  characterisitc  of  machinery  is  it  due  that 
only  so  many  men  can  work  with  one  unit  of  capital  goods? 

The  answer  must  be  shortly  given  and  be  left  to  approve  itself : 
the  one  attribute  of  land  which  finally  discourages  all  attempts  at  sub- 
stitution and  assures  to  land  its  ultimate  relation  of  complementarity, 
appears  to  be  the  spatial  attribute,  the  impossibility  of  compressing 
agricultural  or  building  or  climatic  or  scenic  aspects  of  land  utility 
into  ever-smaller  compass  and  without  limit  of  disadvantage. 

With  machinery  as  related  to  labor,  the  spatial  fact  seems  to  be 
sometimes  important  ;  but  the  complementarity  more  commonly  traces 
to  the  recurrent  necessity,  in  all  machine  processes,  for  the  interven- 
tion  of  volition  and  direction. 

In  further  enforcement  of  the  truth  that  there  is  in  this  common 
and  general  fact  of  complementarity  no  slightest  support  for  the  three- 
fold division  of  productive  factors,  it  may  sufiice  to  recall  that  a 
parallel  necessity  exists  for  supervisory  and  directive  labor  to  go  with 
unskilled  labor,  that  many  different  occupations  occupy  the  comple- 
mentary relation  one  to  another,  and  that  in  a  general  way  each  grade 
of  labor  is  complementary  to  most  other  grades. 

Despite  the  consistently  private-acquisitive  nature  of  the  capital 
concept  adopted  by  Professor  Carver  in  his  Distribution,  and  despite 
his  fundamental  thesis  that  all  agent  remunerations  are  received  upon 
the  basis  and  by  the  measure  of  their  marginal  value  productivity,  he 
yet  finds  it  possible  to  distinguish  land  from  capital.  The  basis  of  his 
distinction  is  technological  so  far  as  it  is  not  imposed  by  certain  doctri- 
nal exigencies  on  the  side  of  costs:  and  yet  the  following  is  from 
Carver's  Distribution  : 

"There  are  various  kinds  of  labor,  of  land,  and  of  capital.  Two 
different  kinds  of  labor  may  be  performing  functions  which  differ 
almost  as  widely  as  those  performed  by  labor  and  capital,  or  by  labor 
and  land.  The  work  of  a  bookkeeper  differs  as  widely  from  that  of  a 
ditch-digger,  as  that  of  a  ditch-digger  does  from  that  of  a  steam 
shovel.  Therefore,  the  same  reasons  which  favor  the  separation  of 
labor  and  capital,  in  order  that  they  be  treated  as  distinct  factors,  will 
also  favor  the  separation  of  one  kind  of  labor  from  another,  or  one  kind 
of  capital  from  another,  and  of  one  kind  of  land  from  another" 
(p.  85). 


132  VALUE  AND  DISTRIBUTION 

general — abstract  capital  in  the  accurate  sense  of  the  term, 
mobile,  fluid,  unspecialized  purchising  power — a  capital  cate- 
gory of  surpassing  importance,  and  later  to  receive  most 
careful  examination;  other  of  this  capital  is  such  by  the 
fact  that,  like  stocks  of  goods,  it  is  readily,  speedily,  and 
advantageously  marketable,  and  so,  private-wise  viewed,  is 
easily,  through  sale,  turned  into  the  abstract  condition  as  an 
intermediate  form,  and  thence  into  whatever  else  the  private 
owner  may  desire. 

But  evidently,  in  this  last  sense  of  mobility  all  forms  of 
capital  and  all  wealth  of  any  sort  are  mobile  in  different 
degrees;  all — as  valuable — are  salable  on  some  terms  and 
at  some  time. 

But  as  a  technological  fact,  capital  is  not  characterized 
beyond  land  or  labor  by  mobility ;  it  is  even  questionable 
whether  it  is  not  the  most  specialized,  the  least  mobile,  of 
the  three.  Some  machinery — indeed,  much  machinery — is 
serviceable  for  only  one  purpose  or  in  only  one  line  of  pro- 
duction, and  is  only  at  great,  or  even  at  entire  loss,  to  be 
readapted  to  another  use;  and  this  is  true,  in  varying 
degrees,  of  all  the  different  forms  and  conditions  of  capital 
goods,  of  labor,  and  of  land.  Neither  mobility  nor  immo- 
bility can  be,  in  this  technological  sense,  regarded 
as  peculiarly  a  characteristic  of  any  one  class  of  productive 
agents. 

But  how  about  spatial  mobility?  There  is,  possibly,  a 
distinction  of  degree :  laborers  do  migrate,  though  so  tardily 
as  to  have  given  them  the  traditional  stamp  of  marked 
immobility.  Land  is,  physically  and  spatially  speaking,  of 
pronounced  immobility ;  capital  is  mobile  in  varying  degrees 
accordingly  as  it  has  become  attached  to  the  land  or  incor- 
porated with  it;  improvements  in  mines  or  in  water-powers 
are  prone  to  stay  where  they  are  originally  placed ;  while, 
on  the  other  hand,  by  carting  of  loam  and  by  grading,  by 
filling  of  swamps  and  of  water  fronts,  to  say  nothing  of  the 
action  of  winds,  the  seeming  fixity  of  land  is  appreciably 
disturbed. 


THE  CAPITAL  CONCEPT  133 

This  seeming  fact  of  fixity  in  land  appears,  then,  to 
have  Httle  in  it,  otherwise  than  as  a  matter  of  mere  extension 
or  superficies ;  and  as  to  this  question  of  superficies  it  is  fair 
to  say  that  it  is  in  no  sense  the  point  at  issue;  for,  in  its 
aspect  of  effectiveness  for  production — its  technological 
significance — land  can  be  worn  out,  displaced,  or  renewed, 
as  readily  as  capital,  and  sometimes  much  the  more  quickly." 

There  appears  to  be  more  in  the  notion  that  land  pre- 
sents an  especial  degree  of  fixity,  or  at  all  events  of  inelas- 
ticity, in  supply.  And  it  must  be  admitted  that,  in  any  given 
state  of  industrial  technique,  this   fact  of  relative  inelas- 
ticity may  hold.   While  it  is  true  that  there  is  today  no  poor~^ 
land  that  capital  will  not  make  into  good  land,  that  moun-  / 
tains  may  by  capital  expense  be  razed,  valleys  filled,  dry  [ 
land  created  out  of  swamp,  or  river,  or  lake,  or  ocean,  it  ' 
remains  true  that  this  is  merely  a  substitution  of  capital  for 
land,  that  it  is  a  limited  process  by  reason  of  the  fact  that 
capital  is  at  any  time  a  limited  quantity,  and  that,  after  all, 
the  opportunities  for  the  profitable  application  of  capital  to 
land  are,  by  the  very  reason  of  this  deficiency  of  capital,  j 
limited  both  in  quantity  and  in  quality,  and,  as  such,  con-l 
tinue  to  be  scarce  and  valuable. 

But  in  last  analysis  all  this  is  merely  to  assert  that  both 

*  With  these  spatial  qualities  of  land  are  more  or  less  closely 
associated  certain  legal,  jurisdictional,  and  territorial  aspects  possess- 
ing great  social  and  institutional  significance.  It  is,  in  truth,  a  com- 
monplace that  the  civil  law  of  England,  and  in  large  measure  the 
economic,  political,  and  social  organizations,  trace  their  origin  back  to 
feudalism,  a  system  in  which  land  ownership  was  the  controlling  and 
directing  fact  for  almost  all  purposes,  political  and  economic,  theo- 
retical and  practical.  The  line  of  cleavage  between  real  property  and 
personal  property  runs  deep  through  all  English  jurisprudence. 

It  would,  then,  be  a  most  interesting  investigation — if  only  one 
had  the  necessary  learning — to  trace  out  the  manner  and  degree  of 
connection  between  the  legal  distinction  of  realty  from  personalty  and 
the  economic  distinction  of  land  from  capital.  That  the  parallelism 
is  more  than  merely  fortuitous  may  be  taken  as  beyond  doubt. 

It  only  remains,  then,  to  inquire  whether  the  common-law  distinc- 
tion between  real  property  an  \  personal  property  recommends  itself  as 
in  any  way  essential  or  necessary,  or  can  point  to  other  than  a  purely 
historical  explanation  or  warrant ;  Roman  law  and  the  derivative  sys- 
tems suffice   for  testimony   to  the  contrary. 


^ 


134  VALUE  AND  DISTRIBUTION 

land  and  capital  are  similarly  limited  in  quantity,  and  are 
thereby  scarce  and  valuable,  and  that  the  device  of  substitu- 
tion is  not  indefinitely  applicable;  if,  then,  any  real  distinc- 
tion is  to  be  established,  it  must  be  based  upon  the  fact  that 
with  the  passing  of  time,  differences  of  tendency  with  regard 
to  supply  come  to  characterize  land  and  capital  respectively. 
And  it  must  be  admitted  that  land  appears  likely,  in  the 
long  future,  to  manifest  a  peculiar  degree  of  inelasticity  in 
supply,  of  which  fact  of  inelasticity  the  law  of  diminishing 
returns  in  its  ordinary  formulation  will  be  a  probable 
expression,  and  the  menace  of  overpopulation  is  a  socio- 
logical inference. 

But  it  must  be  noted,  (i)  that  all  this  is  matter  of 
prophecy,  and  (2)  that  instead  of  approaching,  as  is  ordi- 
narily assumed,  to  moral  certainty,  it  is  not  much  better 
than  conjecture.  The  past  three  or  four  hundred  years 
appear  to  have  presented  the  phenomenon  of  increasing 
land-plenty  relatively  to  labor  and  capital ;  with  the  forces 
of  exploration  and  of  developing  transportation,  new  sup- 
plies of  land  have  far  outrun  the  increase  of  population ; 
elasticity  has,  indeed,  in  a  surpassing  degree — probably,  it 
is  true,  hardly  again  to  be  duplicated — characterized  the 
land  supply.  Capital  meanwhile  appears  not  to  have 
increased  beyond  the  expansion  of  demand  afforded  by  the 
increase  of  land  supply  and  the  growth  of  population, 
since  interest  appears  to  have  been,  in  some  countries  of 
Europe,  as  low  one  hundred  and  fifty  years  ago  as  today, 
then,  with  advancing  capitalistic  opportunities,  to  have 
risen,  now,  with  the  progressive  exhaustion  of  the  new 
opportunities  offered  by  increasing  population  and  enlar- 
ging land  supply,  to  be  again  falling.  Thus,  while  it  seems 
probable  that  the  future  will  meet  an  especial  shortage  in 
land  supply,  this  is  not  at  all  certain.  Food  may,  for  aught 
we  know  to  the  contrary,  one  day  become  a  laboratory  prod- 
uct. "It  is  ...  .  possible  that  chemistry  may  some 
time  solve  the  problem  of  food  production  without  recourse 
to   agricultural    methods.      The    secret    once    learned,    the 


THE  CAPITAL  CONCEPT  135 

nitrogen  in  the  air  of  the  back  yard  and  the  ton  of  coal  in 
the  bin  may  furnish  food  for  an  ordinary  family  for  a 
year." "  And  it  is  to  be  added  that  in  the  future,  as  in  the 
past,  much  will  be  accomplished  by  improving  transportation 
to  mitigate,  if  not  to  prevent,  the  conjectural  dearth  of  land. 

But,  having,  for  the  time  being,  and  in  a  very  broad  and 
general  way,  accepted,  for  purposes  of  retrospect  or  of 
prospect,  the  tenability  of  the  distinction  between  land  and 
other  instrumental  goods,  we  have  thereby  the  more  to 
recognize  the  difficulty  that  expanding  knowledge, — develop- 
ment in  the  human  factor  of  production, — or  improving 
transportation — development  in  both  the  human  and  the 
capital  factors — may  function  technologically  as  substitute 
for  land.  Bettering  transportation  is  more  land ;  true,  geo- 
graphically speaking,  land  is  not  made,  but  accessibility  is 
made,  and  upon  an  enormous  scale :  land  sufficiency,  like 
land  value,  is  in  large  measure  positional. 

But  further :  if,  as  technological  facts,  these  probabilities 
in  the  dynamic  field  are  taken  to  justify,  for  purposes  of 
economic  theory,  a  separate  category  of  land  wealth  as 
against  other  wealth,  there  is  forthwith  to  be  undertaken 
an  indefinitely  large  task  of  further  classification  or  of  sub- 
classification  ;  for  while  grain  land  may  be  becoming  seriously 
scant,  range  lands,  or  champagne  lands,  or  mines,  or  fish- 
eries may  disclose  a  contrary  tendency.  So,  also,  while  the 
provision  of  wooden  implements  is  becoming  increasingly 
inadequate,  the  different  sorts  of  machinery  and  tools  of 
metallic  material  may  be  growing  progressively  cheap;  and 
meanwhile  electrical  apparatus  is  likely  to  abound.  And 
similarly  for  the  human  factor ;  as  one  quality  of  man,  say 
the  athlete  or  the  unskilled  workman,  is  becoming  relatively 
scarce,  doctors  of  philosophy  may  more  than  generously 
multiply. 

Technological  classification,  then,  on  the  basis  of  the 
supply  outlook,  is  a  hopeless  undertaking.     We  have  even 

'  Davenport,  Outlines  of  Economic  Theory,  p.  324. 


136  VALUE  AND  DISTRIBUTION 

come  to  question  whether,  technologically  speaking,  human 
labor  itself  is  a  tenable  economic  category. 

A  further  argument  in  support  of  this  threefold  classi- 
fication now  requires  attention — the  retrospective  and 
genetic  view,  the  argument  from  origins. 

Pausing  merely  to  question  whether,  as  bearing  upon 
the  classification  of  the  factors  of  production — a  techno- 
logical problem — questions  of  origin  are  logically  germane, 
it  is  nevertheless  to  be  recognized  that  the  genetic  view, 
whether  or  not  acceptable  as  a  technological  view,  possesses, 
for  certain  purposes,  great  importance.  The  only  query  is 
whether  these  purposes  are  economic  in  bearing  as  dis- 
tinguished from  historical  or  sociological. 

Not  all  wealth  was  created  by  man.  It  need  not  be 
here  disputed  whether  capital  preceded  labor,  or  the 
other  way  about.  It  looks,  truly,  as  if  environment  were 
present  as  early,  at  least,  as  was  man.  At  any  rate,  there 
exist  unproduced  riches ;  only  the  presence  of  man,  his 
needs  or  desires,  and  not  his  productive  activity,  is  neces- 
sary to  the  emergence  of  some  forms  of  wealth.  Utility 
being  a  relationship  between  a  human  want  and  an  objective 
(external?)  fact,  it  suffices  that  both  terms  of  the  relation- 
ship be  present  in  order  that  wealth  come  into  being. 

Land,  then,  according  to  this  genetic  view,  is  conceived 
as  the  original  environmental  situation,  capital  as  a  human, 
a  labor-produced,  addition.  It  is  argued  that  man,  in  his 
reactions  upon  his  environment,  has  imposed  some  modifi- 
cations upon  the  original  situation;  and  it  is  urged  that 
such  changes  in  the  environment  as  have  not  been  due  to 
environment  itself  are  properly  to  be  attributed  to  man; 
capital  is  thus  conceived  as  this  intermediate  term — this 
aggregate  of  modifications,  so  far  at  least  as  these  modifi- 
cations have  been  advantageous. 

There  is  no  denying  the  logical  adequacy  of  this  point 
of  view;  but  from  any  other  point  of  view  than  this  of 
logical    and   schematic   accuracy,   the   distinction   will    not 


THE  CAPITAL  CONCEPT  137 

serve ;  it  leads  nowhere  when  an  attempt  is  made  to  apply 
it.  From  among  all  the  changes  of  all  the  ages,  who  can 
assume  to  tell  what  environmental  changes  have  been  due 
to  environmental  processes  as  against  human  agencies? 
What  part,  for  instance,  of  the  fertility  or  the  infertility  of  •] 
the  land  has  been  due  to  its  treatment  at  the  hands  of  man, 
to  his  fertilizings,  his  exhaustings,  and  his  denudings ;  what 
part  to  fostering  or  wasting  winds,  to  corals,  to  birds,  to  bugs, 
to  worms,  to  microbes  ?  What  share  of  the  value  of  the  house 
traces  back  to  the  timber  values  of  the  natural  forest,  and 
what  part  to  industrial  processes?  Even  with  the  case  of 
machinery,  the  typical  form  of  capital,  human  wisdom 
would  fall  far  short  of  distributing  the  final  value  between 
the  original  ore  value  as  against  the  labor  value,  the  coal 
value,  and  the  timber  value ;  nor,  for  any  one  of  these  vari- 
ous shares,  would  it  be  possible  to  determine  how  far  land 
rents,  as  expressed  in  warehouse  and  transportation 
charges,  have  counted  in  the  case.  And  finally,  if  anyone 
could  succeed  in  this  allotment  of  origin-credits,  either  for 
the  land  or  for  the  warehouse,  is  it  to  be  supposed  that,  as 
shares  in  the  total  hire  of  the  machine,  these  remunerations 
would  forthwith,  either  in  the  collective  or  in  the  competi- 
tive reckoning,  take  on  a  new  relation  to  the  cost  of  the 
product  or  to  its  value  ? ''' 

^  Senior  was  fully  aware  of  all  this — as  a  difficulty — but  did  not  see 
precisely  what  to  do  with  it:  "It  is  difficult  to  point  out  an  article, 
however  simple,  that  can  be  exposed  to  sale  without  the  concurrence, 
direct  or  indirect,  of  many  hundred,  or,  more  frequently,  of  many 
thousand,  different  producers,  almost  every  one  of  whom  will  be  found 
to  have  been  aided  by  some  monopolized  agent.  There  are  few  things 
of  which  the  price  seems  to  consist  more  exclusively  of  wages  and 
profits  than  a  watch  [MacCulloch's  favorite  example]  ;  but  if  we  trace 
it  from  the  mine  to  the  pocket  of  the  purchaser,  we  shall  be  struck  by 
the  payment  of  rent  ....  at  every  stage  of  its  progress.  Rent  was 
paid  for  the  privilege  of  extracting  from  the  mines  the  metals  of  which 
it  is  composed  ;  for  the  land  which  afforded  the  materials  of  the  ships 
in  which  those  metals  were  transported  to  an  English  port ;  for  the 
wharves  at  which  they  were  landed,  and  the  warehouses  where  they 
were  exposed  for  sale  ;  the  watchmaker  pays  a  rent  for  the  land  covered 
by  his  manufactories,  and  the  retailer  for  that  on  which  his  shop  is 
situated.  The  miner,  the  shipwright,  the  housebuilder,  and  the  watch- 
maker, all  use  implements  formed  of  materials  produced  by  the  same 
processes    as    the    materials    of    the    watch,    and    subject    also    in    their 


138  VALUE  AND  DISTRIBUTION 

But  is  there,  after  all,  nothing  for  theoretical  purposes, 
in  any  of  these  technological  distinctions,  as  bearing  upon 
the  classification  of  productive  factors  ?  What,  for  example, 
does  the  socialist  mean  in  his  demand  that  all  capital  be 
owned  by  society?  Note,  however,  that  he  as  often  insists 
that  all  instruments  of  production  be  socialized,  and  in  this 
way  of  putting  it  denies,  or  at  least  ignores,  all  distinctions 
between  land  wealth  and  other  wealth.  The  line  of  distinc- 
tion is  substantially  that  of  the  traditional  separation  of 
consumption  from  production  goods ;  land  and  capital  are 
equally  included  within  production  goods  and  are  equally 
excluded  from  consumption  goods ;  they  are  intermediate 
instrumental  goods. 

It  may  as  well  be  said  forthwith  that  this  distinction 
between  production  goods  and  consumption  goods  is 
service ful  for  many  purposes :  it  will  be  the  task  of  later 

different  stages  to  similar  payments  of  rent When  we  speak, 

therefore,  of  a  class  of  commodities  as  produced  under  circumstances 
of  equal  competition,  or  as  the  result  of  labor  and  abstinence,  unas- 
sisted by  any  other  appropriated  agent,  and  consider  their  price  as 
equal  to  the  sum  of  wages  and  profits  that  must  be  paid  for  their  pro- 
duction, we  do  not  mean  to  state  that  any  such  commodities  exist,  but 
that,   if  they  did  exist,   such  would  be  the  laws  by  which  their  prices 

would    be    regulated We    may    be    asked,    then,    whether    the 

improvements  which  form  the  greater  part  of  the  value  of  the  soil  of 
every  well-cultivated  district  are  all,  and  forever,  to  be  termed  capital ; 
whether  the  payments  received  from  his  tenants  by  the  present  owner 
of  a  Lincolnshire  estate,  reclaimed  by  the  Romans  from  the  sea,  are 
to  be  termed  not  rent,  but  profit  on  the  capital  which  was  expended 
fifteen  hundred  years  ago.  The  answer  is,  that  for  all  useful  purposes 
the  distinction  of  profit  from  rent  ceases  as  soon  as  the  capital,  from 
which  a  given  revenue  arises,  has  become,  whether  by  gift  or  by  inherit- 
ance, the  property  of  a  person  to  whose  abstinence  and  exertions  it  did 
not  owe  its  creation.  The  revenue  arising  from  a  dock,  or  a  wharf,  or 
a  canal,  is  profit  in  the  hands  of  the  original  constructor.  It  is  the 
reward  of  his  abstinence  in  having  employed  capital  for  the  purposes 
of  production  instead  of  those  of  enjoyment.  But  in  the  hands  of  his 
heir  it  has  all  the  attributes  of  rent.  It  is  to  him  the  gift  of  fortune, 
not  the  result  of  a  sacrifice.  It  may  be  said,  indeed,  that  such  a 
revenue  is  the  reward  for  the  owner's  abstinence  in  not  selling  the  dock 
or  the  canal  and  spending  its  price  in  enjoyment.  But  the  same 
remark  applies  to  every  species  of  transferable  property.  Every  estate 
may  be  sold,  and  the  purchase  money  wasted.  If  the  last  basis  of 
classification  were  adopted,  the  greater  part  of  what  every  political 
economist  has  termed  rent  must  be  called  profit." — Senior,  Political 
Economy,  6th  ed.  (London),  pp.  112-29,  passim. 


THE  CAPITAL  CONCEPT  139 

pages  not  to  attack  it  but,  through  a  more  careful  refoniiu- 
lation  of  the  productivity  concept,  to  extend  it.  But  mean- 
while it  is  necessary  again  to  point  out  that,  as  a 
technological  classification,  the  distinction  holds  only  as 
socially  viewed.  Private  interests  have  little  occasion  for 
the  distinction ;  productivity  for  competitive  purposes  is 
quite  another  thing   from  technological   productivity. 

But  now,  finally,  even  if  it  be  possible,  from  the  point  of 
view  of  origins,  to  establish  between  land  wealth  and  other 
wealth  distinctions  at  once  theoretically  tangible  and  prac- 
ticably workable — and  even  admitting  that  the  techno- 
logical outlook  is  so  far  clear  and  its  problems  so  far 
susceptible  of  present  formulation,  as  to  make  the  distinction 
one  of  manifest  relevancy  to  the  welfare  outlook  and  of 
definite  significance  for  the  terms  of  the  future  situation 
within  which  the  value  and  distribution  problems  must  one 
day  be  worked  out, — admitting,  that  is  to  say,  that  over  long 
intervals  of  time,  in  the  dynamics  of  value  and  of  distribu- 
tion, important  tendencies  are  especially  associated  with  the 
land  category,  is  it  at  the  same  time  at  all  to  be  admitted  that 
in  any  current  investigation  of  the  process  of  present  value 
fixation — the  value  problem  in  cross-section — these  possible 
or  probable  outlooks,  these  long-time  prophecies,  have  any 
bearing  to  suggest  that,  in  a  competitive  society,  the  pro- 
ductive powers  of  land  are  differently  remunerated,  or  bear 
a  relation  to  costs  and  to  values  different  from  other 
productive  powers  and  agents?  If  it  were  proved,  or  other- 
wise accepted,  that  labor  is  likely  to  get  more  scarce,  would 
this  suffice  to  exclude  present-day  wage  outlays  from 
present-day  costs?  Some  difficult  problems  with  regard  to 
the  capital  concept  and  to  the  basis  of  interest  may  be 
avoided  through  holding  in  mind  that  our  problem  is  the 
value  problem,  and  that  the  correct  formulation  of  the 
capital  concept  is  primarily  and  chiefly  important  as  bearing 
on  this  problem.  Laborers  may  get  more  numerous  and 
more  skilful   or   less   skilful;   capital   goods   may   increase 


I40  VALUE  AND  DISTRIBUTION 

relatively  to  other  productive  agents,  or  possibly  decrease; 
land  may  get  better  or  worse  with  climatic  or  other  changes, 
and  relatively  to  the  situation  become  more  or  less  abundant 
or  more  or  less  adequate ;  but  in  each  new  situation  there 
will  be  nothing  new  but  the  situation  and  the  distributive 
outcome ;  the  value  problem  in  its  setting  of  new  terms  will 
remain  in  principles,  and  in  methods  of  analysis,  the  same 
problem,® 

*  Not  only  with  students,  but  in  economic  literature,  does  this  dis- 
tinction between  the  static  analysis  and  the  dynamic  aspects  of  the 
conditions  under  which  the  static  analysis  is  to  be  applied,  present 
itself  as  the  occasion  of  great  perplexity.  But  if  for  no  other  reason, 
the  purely  problematic  quality  of  these  dynamic  forecasts  should  suffice 
to  deny  them  a  controlling  influence  in  value  theory.  Take  it,  indeed, 
as  true  that  during  the  last  few  centuries  of  exploration  and  of  develop- 
ing transportation,  new  supplies  of  land  have  far  outrun  the  increase 
of  population,  that  elasticity  has  especially  characterized  the  land 
supply ;  or  take  the  contrary  of  all  this  for  true ;  what  of  it,  for 
purposes  of  rent  as  an  element  then  or  now  in  the  cost  computation? 
or  how  does  the  past  trend  of  the  interest  rate,  or  the  probable  future 
trend,  bear  upon  the  question  as  to  whether  interest  shall  or  shall  not 
at  any  given  time  rank  as  an  element  of  cost?  By  virtue  of  wars  suffi- 
ciently grievous  and  of  plagues  sufficiently  decimating,  population  may 
turn  toward  decrease  ;  would  wages  then  become  no  part  of  cost, 
though  now,  and  for  any  probable  future,  they  are  accepted  as  properly 
included?  And  how,  again,  if  tke  late  tendencies  toward  a  restricted 
birth  rate  become  still  more  marked?  Will  then  a  new  value  doctrine 
have  to  be  recognized,  or  will  it  be  merely  true  that  the  old  doctrine 
will  remain  valid  for  a  new  application  under  the  new  setting  of  the 
changed  conditions  ? 


CHAPTER  XI 

CAPITAL  AS  A  COMPETITIVE  CONCEPT 
It  is  chiefly  as  bearing  upon  cost  of  production  in  its 
relation  to  market  values,  that  the  concept  of  capital  becomes 
of  surpassing  concern  in  theoretical  economics.  And  regarded 
from  this  point  of  view,  the  field  of  investigation  widens 
surprisingly :  What  are  the  relations  of  capital  hire  to 
market  prices  ?  Is  a  tenable  distinction  to  be  drawn  between 
these  and  rent  outlays  on  the  one  hand,  and  wage  outlays 
on  the  other?  Or,  so  far  as  cost  and  value  purposes  are 
concerned,  might  not  rent  or  wages  be  logically  extended 
to  cover  all  forms  of  remuneration  to  any  sort  of  produc- 
tive agent  or  instrument?  In  fact,  is  cost  of  production  an 
everyday  business  concept,  or  is  it  something  peculiar  to 
economic  analysis?  And  if  this  latter,  are  capital  outlays 
to  be  confined  only  to  expenditures  for  the  use  of  inter- 
mediate goods  in  the  time  aspect,  or  are  they  to  include  all 
forms  of  burden  and  subtraction  imposed  upon  the  capital 
reserves  of  the  entrepreneur  producer  in  the  business  pro- 
cess of  supplying  goods  to  the  market?  In  sum,  may  we 
not,  for  cost  purposes,  accept  a  point  of  view  of  capital 
which  regards  it  solely  as  the  source  of  expenditure — 
capital  conceived  in  such  fashion  that  interest  payments  are 
to  be  regarded  as  paid  from  it  rather  than  for  the  use  of  it, 
and  that  rent  outlays  are  as  truly  burdens  upon  it — and  cost 
elements  under  it — as  were  outlays  ever  burdens  or 
costs,  whether  under  the  later  theory,  or  under  the  earlier 
wage- fund  capital  notion,  with  its  attendant  wage-capital 
cost  outlay  ? 

And  further :  having  recognized  hires  of  labor,  of  land 
instruments,  and  of  all  other  instruments  as  equally  cost 
outlays,  must  we  not  likewise  go  on  to  recognize,  as  also 
of  cost  relevancy,  the  question  of  when  these  various  hire 

141 


142  VALUE  AND  DISTRIBUTION 

outlays  have  to  be  met,  and  of  the  time  elapsing  between 
the  expenditure  and  their  recoupment  by  sale? 

Not  at  all  denying  that,  for  certain  purposes,  capital  has 
rightly  been  and  must  continue  to  be  discussed  as  a  social 
category,  as  production  goods,  it  is  intended  sharply  to 
raise  the  question  whether  this  concept  of  capital  has  any 
significance  for  the  cost-of-production  analysis  or  for  any 
purpose  connected  with  the  value  problem — whether,  also, 
the  social  concept  of  capital,  the  purely  industrial  and 
mechanical  and  non-competitive  concept,  is  not  entirely 
irrelevant  to  the  processes  of  competitive  society  and  of 
entrepreneur  production,  and  to  the  thought  and  conduct 
of  the  actual  business  world. 

It  is  doubtless  true  that  classical  economics  contains  a 
considerable  number  of  distinct  and  antagonistic  concepts 
of  cost,  but  it  is  none  the  less  true  that  whenever  the  argu- 
ment shifts  from  the  Crusoe  discussion  to  the  competitive 
market,  and  becomes  definite  in  its  analysis  and  tangible  in 
its  applications,  the  concepts  of  time  cost  and  pain  cost 
somehow  shade  ofif,  as  we  have  seen,  into  some  aspect  of 
labor-value  cost  as  the  basis  of  employer's  outlay ;  or,  as 
especially  with  Ricardo,  by  regarding  pain  cost  as  the  basis 
and  explanation  of  the  remuneration  to  the  wage-earner 
and  thereby  of  the  wage  outlay  to  the  entrepreneur,  values 
are  made,  through  the  mechanism  of  entrepreneur  costs,  to 
be  proportional  to  the  labor-pain  investment  in  produc- 
tion. 

Whether  or  not  labor  was  thus  susceptible  of  reduction 
to  a  common  denominator  cither  of  pain  or  of  time,  and, 
even  if  so,  whether  labor  could  serve  as  the  ultimate  expla- 
nation of  the  very  evident  market  reduction  of  it  to  the 
common  denominator  of  money  wages,  and  whether  or  not 
Ricardo's  marginal  device  for  getting  rent  payments  out  of 
the  category  of  price-determining  costs  may  in  any  view  be 
accepted,  it  remains  in  any  case  clear  that  Ricardo's  reckon- 
ing of  costs  is  essentially  a  business  man's  computation  as 


CAPITAL  AS  A  COMPETITIVE  CONCEPT  143 

a  question  of  money  outlays — outlays  of  the  sort 
which  a  business  man  always  reckons  as  demands  upon 
business  capital,  outlays  of  the  sort  which  the  trading  or 
manufacturing  corporation  provides  for  through  its  sub- 
scribed capital  or  through  capital-borrowings  upon  the 
market.  And  it  is  in  this  sense,  and  rightly,  but  only  in 
this  sense,  that  wages  may  be  spoken  of  as  paid  out  of 
capital ;  but  in  this  sense  also  raw  materials  are  purchased 
out  of  capital — office  furniture  purchased  out  of  capital ; 
business  connections,  insurance,  and  advertising  paid  for  out 
of  capital ;  in  this  sense  interest  and  rent  are  paid  out  of 
capital ;  and  so  likewise  with  all  other  business  expenses 
incurred  in  the  process  of  getting  goods  upon  the  market. 
This  concept  of  capital  is  now  to  be  presented  as  the  only 
concept  which  can  be  articulated  with  the  business  world's 
notion  of  cost  of  production,  and  the  only  concept  which,  in 
the  development  of  economic  theory  or  in  close  economic 
analysis,  can  be  regarded  as  having  any  relevancy  to  those 
cost-of-production  considerations  which  have  to  do  with 
an  inquiry  into  price  and  value.  And  again  be  it  repeated 
that  it  is  chiefly  as  bearing  upon  the  value  problem  that  the 
need  exists   for  a   re-examination  of  the   capital   concept. 

Social  capital  and  jujifkpctitive  capital. — Whatever  might 
be  the  accepted  theory  of  value  in  a  collectivist  society — 
whether  a  labor  theory  or  a  utility  theory,  or  quite  as  possi- 
bly no  theory  at  all  and  no  need  of  any — it  is  clear  that 
differences  in  land  as  used  for  productive  purposes  would 
receive  recognition;  per  item  of  product  obtained,  outlays 
upon  some  land  would  be  appreciably  lower  than  upon  other 
land.  It  is  equally  clear  that  some  of  the  product  of  this 
society  would  need  be  saved  as  raw  material  or  as  tools  for 
further  production ;  but  it  is  not  clear  that  these  saved 
products  would  be  exclusively  traceable  either  to  land  or  to 
labor;  in  fact,  it  is  certain  that  some  labor  product  would 
get  embodied  in  the  land,  and  that  some  land  product  would 
be  traceable  in  all  or  nearly  all  forms  of  collectivist  wealth, 


144  VALUE  AND  DISTRIBUTION 

whether  of  the  production  or  of  the  consumption  type. 
Probably,  however,  in  any  given  situation  of  environmental 
conditions,  distinctions  between  wealth  as  land  product  and 
wealth  as  labor  product  would  not,  to  this  collectivist 
society,  be  especially  interesting, — the  problem  all  the  while 
remaining  one  of  how  to  get  the  best  results  out  of  the 
various  forms  of  wealth  at  hand.  If,  however,  the  society 
were  semi-predatory  in  character,  and  were  making  com- 
parison of  different  habitats  to  be  contested  for,  it  might 
well  find  itself  at  indift'erence  as  between  one  habitat  of 
poor  original  quality  and  of  medium  ameliorations,  but 
with  great  store  of  agricultural  appliances,  as  against 
another  of  great  natural  fertility,  an  inferior  measure  of 
land  amelioration,  and  very  defective  agricultural  appli- 
ances. So,  in  the  application  of  its  labor  power,  land  at  one 
time,  and  at  another  time  the  tools  and  appliances  of  culti- 
vation, might  lead  in  the  call  for  reinforcement.  In  short,  a 
collectivist  society  would  not  need  to,  and  could  not  if  it 
needed,  distribute  its  productive  possessions  into  land  and 
capital  categories. 

As  this  society  would  be  without  competitive  production 
and  without  competitive  markets,  it  would  have  no  need  for 
exchange-value  methods  or  measures.  Production  would 
take  place  according  to  some  sort  of  utility  standard  in 
consumption,  and  productive  agents  would  be  rated  in  esteem 
according  to  their  efficiency  in  utility  creation.  Land  agents 
and  capital  agents  would  stand  on  a  common  basis  of  esti- 
mation. The  different  members  of  the  society  being 
regarded  as  substantially  equal,  both  production  and  con- 
sumption would  necessarily  be  worked  out  according  to 
considerations  of  utility — marginal  utility,  of  a  vague  and 
average  sort  doubtless — instead  of,  as  now,  according  to 
exchange  values,  wherein  purchasing  power,  and  not  utility 
(excepting  as  utility  may  more  or  less  affect  the  purchasing 
disposition),  selects  the  consumers  and  determines  the 
direction  of  production. 

Under  such  conditions,  what  portion  of  the  social  posses- 


CAPITAL  AS  A  COMPETITIVE  CONCEPT  145 

sions  would  rank  as  capital,  and  what  would  be  the  the 
essential  meaning  of  the  concept?  In  accurate  analysis, 
would  it  be  possible  to  accept  the  technological  notion  of 
capital  as  comprising  all  wealth  held  for  purposes  of  further 
production — all  technologically  intermediate  products — in 
the  ordinary  industrial  sense,  productive  wealth,  non-con- 
sumption goods?  Would  the  time  element  count  for  any- 
thing, in  other  than  this  industrial-mechanical  aspect?  Or 
must  all  wealth  be  regarded  as  capital  ?  How  about  the  ice 
stored  till  summer;  or  the  wine  aging  in  the  collectivist 
vaults ;  or  the  wheat  stored  for  winter ;  or  the  total  of  con- 
sumption goods  waiting  the  time  of  maximum  service  in 
consumption  ? 

It  is  past  question  that,  especially  with  capital  socially 
viewed,  the  earlier  notions  of  capital,  like  the  later,  have 
not  merely  referred  capital  to  productivity,  but  have  inter- 
preted productivity  in  the  light  of  technological  applica- 
tions, and  as,  on  the  whole  or  mainly,  a  technological 
phenomenon,  a  category  of  instruments,  tools,  and  appliances. 
This  test  once  accepted,  and  the  attempt  being  at  the  same 
time  made  to  articulate  it  with  the  test  of  origins,  capital 
emerged  as  all  non-land  forms  of  instrumental  goods.  But 
more  and  more  the  especial  function  of  machinery  was  per- 
ceived to  be  the  utilization  of  the  forces  and  energies  of  the 
environment — of  "nature."  More  and  more  Adam  Smith's 
naive  handicraft  view  that  "no  equal  quantity  of  labor 
employed  in  manufactures  can  ever  occasion  as  great  a 
reproduction  as  in  agriculture ;  in  this  nature  does  nothing, 
man  does  all,"  was  seen  to  be  misleading.  A  windmill  is 
merely  wealth  set  where  natural  forces  will  achieve,  in 
co-operation  with  it,  or  will  enable  it  to  achieve,  desirable 
results.  But  precisely  this  is  the  case  with  the  cider  matur- 
ing to  vinegar,  or  with  the  wine  acquiring  age  and  flavor, 
or  with  the  sapling  reaching  up  to  become  a  tree;  whereat, 
as  we  have  seen,  Ricardo  was  sorely  puzzled,  and  James 
Mill  blundered  into  a  great  joke. 

But  it  has  now  become  clear  enough  that  the  techno- 


146  VALUE  AND  DISTRIBUTION 

logical  concept  of  capital  takes  account  of  only  one  aspect 
of  capital  productivity.  That  the  ice  is  melting  away  or  the 
wine  falling  off  in  point  of  gallon  measures  is  not  con- 
clusive of  the  productivity  problem.  If  the  utility  grows, 
whether  by  one  sheep  growing  into  two,  or  one  small 
sheep  to  one  large  one,  or  one  poor-mutton  sheep  to  one  of 
good  quality,  or  one  superfluous  sheep  to  a  famine-time 
sheep,  there  is,  at  least  under  a  collectivist  reckoning,  eco- 
nomic productivity.  So  long  as  either  the  objective  good 
changes  its  character  so  as  to  change  its  utility  relation 
to  man,  or  so  long  as  man  so  changes  in  needs  and  desires, 
or  in  provisionment,  as  to  modify  the  utility  relation  between 
goods  and  men,  there  is  room  for  value  productivity.  The 
collectivist  definition  of  capital  would  then  run  somewhat 
as  follows :  wealth  held  for  increment — wealth  in  time. 

However  clear,  then,  for  technological  purposes,  may 
be  the  distinction  between  land  wealth  and  other  wealth, 
the  distinction  remains  mostly  valueless  for  the  theoretical 
economics  of  a  collectivist  society.^ 

Capital  ill  the  competitive  sense. — Examining  now  some- 
what more  closely  the  capital  concept  as  adapted  to  a  com- 
petitive society,  we  ask  how  far  and  with  what  modifications 
the  collectivist  capital  concept  of  wealth  as  fund, 
wealth  in  time,  can  be  made  to  serve  for  competitive  pur- 
poses. There  will  come,  at  all  events,  this  change — that  we 
shall  be  talking  in  terms  of  exchange-value  denominators, 
exchange- value  production,  exchange  value  of  agents, 
exchange-value  computations  of  gain,  rather  than  in  terms 
of  average  service,  or  of  some  sort  of  group-marginal 
utility.     In  a  general  way  doubtless,  technological  produc- 

*  Perhaps  it  should  go  without  saying  that  a  collectivist  society 
would,  for  this  purpose,  have  no  concern  with  any  question  of  absti- 
nence, otherwise  than  as  bearing  upon  the  store  of  goods  waiting  to  be 
named.  Abstinence,  so  far  as  it  applied  at  all,  would  apply  to  all 
forms  of  the  society's  wealth  ;  and  all  of  the  wealth  would  stand  as 
capital.  Abstinence  would  bear  only  upon  the  volume  accumulated. 
But  there  would,  of  course,  remain  questions  enough  as  to  the  forms 
and  uses  into  which  this  store  of  wealth  should  be  distributed. 


CAPITAL  AS  A  COMPETITIVE  CONCEPT  147 

tivity  in  terms  of  utility  product  will  be  paralleled  in  com- 
petitive society  by  a  technological  productivity  in  value 
product.  But  not  everywhere ;  for  it  sometimes  falls  out, 
in  competitive  society,  that  the  short  output  commands  an 
aggregate  sale  value  higher  than  the  bountiful  output;  that 
the  spices  have  to  be  sunk — mechanical  destruction,  but 
value  creation — or  that  monopolistic  combinations  are 
formed,  to  the  result  of  diminished  product  and  higher 
prices — a  plus  in  value,  but  a  minus  in  utility. 

But  none  the  less,  such  and  so  many  productive  agents, 
technologically  considered,  as  there  are  in  competitive 
society  will,  under  the  value  denominator,  rank  as  capital, 
whether  these  be  land  agents  or  other ;  all  consumption 
goods,  also,  will  in  strict  logic  be  so  included,  since  all  are 
held  because  an  advantage,  an  increment,  lies  with  post- 
poned consumption.  Even  with  goods  deteriorating  or 
decaying,  as  objectively  considered,  the  advantage  is  on  the 
side  of  delay ;  it  is  not  conclusive  that  half  the  apples  stored 
in  the  cellar  will  rot,  or  that  the  ice  in  the  shed  will  lose 
half  its  weight  before  summer. - 

^  Up  to  this  point  Professor  Fetter's  views  seem  to  be  in  the  main 
worthy  of  acceptance.  However,  his  formulation  of  capital  as  material 
goods  conceived  in  one  aspect,  their  market  value,  does  not  quite  accu- 
rately apply,  and,  indeed,  was  not  intended  to  apply,  to  the  collectivist 
economy ;  market  value  is  not  a  collectivist  category.  As  applied  to 
competitive  society,  the  formulation  appears  to  be  much  too  narrow, 
the  criticism  centering  mostly  upon  the  word  "material." — See  Fetter. 
Quarterly  Journal  of  Economics,  November,  1900  ;  May,  1901  ;  Novem- 
ber, 1902. 

But  in  his  Principles,  Professor  Fetter  occasionally  manifests  small 
faith  in  this  requirement  of  materiality :  "Capital  today  may  be 
defined  as  economic  wealth  expressed  in  terms  of  the  general  unit  of 
value"  (p.  115)  ;  a  definition  wide  enough  to  include  immaterial  goods 
privately  owned  ;  and  on  page  129  it  is  said  :  "Men  seek  to  convert  into 
marketable  capital  any  increase  of  income  in  their  wealth  or  busi- 
ness  The  basis   of  capital   value  is   income,   and  whatever  be 

its  cause,  political  or  economic,  material  income  can  and  will  be  capi- 
talized and  added  to  the  capital  value  of  the  privilege,  wealth,  or  indus- 
try on  which  the  income  is  conditioned." 

But,  interpreting  this  definition  given  on  page  115,  it  is  said:  "By 
this  definition,  capital  at  any  given  moment  of  time  includes  all  eco- 
nomic   goods    in    existence,    when    they    are    thought    of    in    terms    of 

their  value.     But  things  have  different  durations Most  capital 

is  composed  of  things  durable  in   a   large  degree The   things 

composing  capital  are  concrete  things,  scarce  forms  of  wealth." 


148  VALUE  AND  DISTRIBUTION 

Perhaps  this  is  all  that  need  be  said  for  capital  in  a  com- 
petitive society,  so  far  as  there  is  occasion  or  justification 
for  a  distinctly  social  concept  for  capital  in  a  competitive 
society ;  and  doubtless  there  are  for  some  purposes  both 
occasion  and  justification.  But  for  most  purposes  the  social 
concept  does  not  apply,  simply  because  the  activities  of  men 
in  society  are  competitively  and  not  socially  organized. 

But,  as  a  computation  of  competitive  costs,  regarded 
from  the  point  of  view  of  supply-determining  influences 
and  as  having  thereby  bearing  upon  the  value  adjustments 
of  the  market,  another  and  quite  different,  and  even  a 
radically  inconsistent,  concept  of  capital  demands  atten- 
tion. Actual  business  computations  of  the  expenses  of  pro- 
duction include  a  wide  range  of  expenditures  made  out  of 
what,  in  the  individual  reckoning,  stands  as  the  total  busi- 
ness investment,  and  functions  in  the  terminology  and 
reckoning  of  the  business  world  as  business  capital.  It  is, 
for  example,  in  the  sense  of  Mill's  doctrine,  this  sort  of 
capital  that  limits  labor,  this  sort  of  capital  out  of  which 
wages  are  paid.^ 

^  Capital  in  the  technological  sense  has  evident  bearing  upon  the 
wages  of  labor,  not  indeed  by  determining  whether  or  not  labor  shall  be 
employed — for  this  is  in  ordinary  times  certain,  whatever  may  be  the 
volume  of  capital — but  by  determining  the  manner  and  effectiveness  of 
its  employment,  the  productive  equipment  at  its  disposal,  its  outillage. 
It  is  in  this  sense  only  that  capital  may  rightly  be  said  to  limit  labor 
and  to  stand  in  causal  relation  to  the  wages  of  labor.  But  this  is  not 
the  sense  in  which  the  term  "capital"  is  used  in  the  wage-fund 
doctrine  ;  it  is  there  used  in  the  sense  of  an  employment  fund,  a  sub- 
division of  business  capital,  rather  than  as  a  technological  quantity ; 
in  this  business  sense  of  capital,  subsistence  goods  are  properly  included 
only  to  the  extent  that  they  are  actually  a  part  of  the  entrepreneurs' 
holdings  ;  that  wage  outlays,  whether  finally  expended  in  subsistence  or 
in  other  goods,  are  made  out  of  the  cash  or  banking  credits  in  the 
employer's  control,  proves  merely  that  from  his  point  of  view  this  cash 
or  these  credits  must  be  regarded  as  capital.  There  is  little  connection, 
if  any,  and  certainly  no  direct  connection,  between  the  volumes  of 
business  capital  or  credit  in  society  and  the  real  wages  of  labor.  True, 
any  one  employer  can  hire  more  labor  if  he  controls  a  larger  business 
capital,  but  only  upon  the  assumption  that  competing  employers  have 
not  a  like  increase  of  capital.  The  old  fallacy  of  reasoning  from  one  to 
all  is  well  illustrated  here.  And  in  any  case,  it  does  not  follow  that 
having  more  business  capital,  an  employer  can  afford  to  pay,  or  will 
for  any  reason  pay,  a  higher  wage  rate. 


CAPITAL  AS  A  COMPETITIVE  CONCEPT  149 

In  the  coinpntation  of  competitive  entrepreneur  costs, 
that  is  to  say,  interest  charges  are  reckoned  upon  something 
quite  other  than  technological  capital.  Entrepreneur  capital 
— capital  in  the  guise  in  which  the  type-form  of  modern 
business,  the  corporation,  presents  it — includes  not  merely 
consumption  goods  in  stock,  but  banking  balances,  counter 
money,  funds  tied  up  in  customers'  accounts  and  in  bills 
receivable  of  many  varieties,  corporate  stocks  and  securi- 
ties, whether  held  for  sale  or  for  investment,  and  generally 
all  that  fund  of  working  capital,  more  or  less  unspecialized, 
requisite  for  the  successful  functioning  of  a  business.  The 
manufacturing  entrepreneur  or  the  corporation  manager 
would  find  it  a  novel  and  perplexing  doctrine  which  should 
restrict  the  capital  investment  to  the  buildings,  machinery, 
and  raw  materials  of  the  undertaking;  the  corporation  really 
possesses  nothing  that  is  not  capital. 

But  it  is  still  true  that  these  non-technological  forms  of 
capital  deserve  not  so  much  greater  recognition  than  they 
have  in  the  past  received,  as  more  careful  analysis  and 
classification ;  for,  as  has  already  been  pointed  out,  classical 
discussion,  as  indeed  all  economic  discussion,  early  or 
modern,  is  full  of  this  entrepreneur-capital  concept. 

Adam  Smith,  for  example,  rarely  failing  somewhere  to 
formulate  or  to  employ  the  correct  as  well  as  the  incorrect 
doctrine  on  almost  every  economic  question,  is  now  and 
then  entirely  satisfactory  in  his  treatment  of  the  entrepre- 
neur-capital concept.  Perceiving  clearly  that  the  funda- 
mental and  essential  characteristic  of  capital  is  found  in  the 
acquisitive  purpose,  the  increment  purpose,  of  its  holding, 
and  observing  that  individuals  often  gain  by  lending  to 
others  or  by  employing  their  wealth  in  some  socially  non- 
productive application — on  which  question  of  non-produc- 
tiveness he  was  notoriously  much  confused — it  all  the  while 
remaining  true  that  communities  as  isolated  aggregates  can 
gain  only  through  productive  processes  of  some  sort,  he 
divided  acquisitive  goods   into   the  two   categories,   social 


ISO  VALUE  AND  DISTRIBUTION 

and  private.  And  out  of  this,  as  Boehm-Bawerk  believes, 
has  grown  up  the  idea  that  private  capital  is  connected  with 
interest  and  is  especially  a  category  of  distribution,  while 
social  capital  belongs  rather  within  the  field  of  production.* 

And  doubtless  such  an  idea  has  developed;  but,  so  far  as 
Adam  Smith  had  any  choice  between  his  different  idea- 
vistas,  this  could  hardly  have  been  the  doctrine  of  his  pref- 
erence. For  the  most  part  he  was  talking  of  private 
capital  as  a  category  of  private — that  is  to  say,  of  competi- 
tive— business ;  not  of  interest-getting,  but  of  any  sort  of 
gain-acquiring  through  business  activities,  whether  indus- 
trial or  merchandizing  or  what  not. 

It  is  in  this  sense  of  entrepreneur  capital  that  in  the 
Introduction  he  starts  off  the  wage-fund  doctrine  on  its 
course  with  the  remark : 

The  number  of  useful  and  productive  laborers,  it  will  hereafter 
appear,  is  everywhere  in  proportion  to  the  quantity  of  capital 
stock  which  is  employed  in  setting  them  to  work,  and  to  the 
particular  way  in  which  it  is  employed. 

So,  likewise,  in  his  comparison  of  corn  prices  in  England, 
France,  and  Poland,  where  he  explains  that,  despite  the 
greater  productiveness  of  agriculture  in  the  more  advanced 
countries,  the  prices  are  rarely  lower  in  the  more  advanced 
countries,  since  the  superiority  of  produce  commonly  not 
more  than  balances,  and  often  does  not  fully  balance,  the 
"greater  labor  and  expense  bestowed  on  them,"  he  is 
employing  a  competitive,  an  entrepreneur,  concept  of  cost, 
in  terms  of  wage  payments  and  of  all  outlays  and  disburse- 
ments in  general.  These  outlays  and  disbursements  are 
never  made  in  terms  of  technological  capital,  and  rarely  in 
terms  of  laborers'  supplies — consumption  goods ;  and  for 
the  purposes  of  Smith's  argument,  as  well  as  for  the  entre- 
preneur's business  computation,  it  does  not  at  all  matter  in 
what  form  or  terms  the  payments  are  made. 

And  so  again,  in  chap,  vi : 

Over  and  above  what  may  be  sufficient  to  pay  the  price  of 
materials  and  the  wages  of  the  workmen,  something  must  be  given 

*  Positive  Theory  of  Capital,  p.  27. 


CAPITAL  AS  A  COMPETITIVE  CONCEPT  151 

for  the  profits  of  the  undertaker  of  the  work  who  hazards  his 
stock  in  the  adventure  ....  the  profits  of  the  employer  upon  the 
whole  stock  of  labor  and  materials  which  he  advanced. 
No  employer,  however,  can  be  regarded  as  advancing  a 
stock  of  labor  in  any  other  sense  than  that  of  advancing 
the  wages ;  Adam  Smith  is  plainly  within  the  concepts  of 
entrepreneur  cost  and  of  entrepreneur  capital.  And  again 
in  chap,  viii,  on  "Wages,"  he  explains  that  labor  is  rightly 
treated  as  a  commodity  like  any  other;  if  capital  is  increas- 
ing faster  than  population,  wages  get  the  benefit; 
employers  fall  into  sharp  competition: 

The  demand  of  those  who  live  by  wages,  it  is  evident,  cannot 
increase,  but  in  proportion  to  the  increase  of  the  funds  which  are 
destined  for  wages. 

Ricardo,  as  we  have  seen,  found  his  way  over  from 
real  value  to  market  value  through  the  mechanism  of  entre- 
preneur competition,  with  its  leveling  and  proportioning 
effects ;  all  of  his  reasoning  on  market  value  goes  upon 
entrepreneur  costs,  and  thereby,  tacitly  or  in  terms,  assumes 
the  entrepreneur  concept  of  capital : 

Whilst  every  man  is  free  to  employ  his  capital  where  he  pleases, 
he  will  naturally  seek  for  it  that  employment  which  is  most  advan- 
tageous; he  will  naturally  be  dissatisfied  with  a  profit  of  10  per 
cent,  if  by  removing  his  capital  he  can  obtain  a  profit  of   15  per 

cent It  is  perhaps  very  difficult  to  trace  the  steps  by  which 

the  change  is  eflfected ;  it  is  probably  effected  by  the  manufacturer 
not    absolutely    changing    his    emploj-ment,    but    only    lessening    the 

amount  of  capital  he  has  in  that  employment The  monied 

class  ....  are  engaged  in  no  trade,  but  live  on  the  interest  of 
their  money,  which  is  employed  in  discounting  bills  or  in  loans  to 
the  more  industrious  part  of  the  community.  The  banker,  too, 
employs  a  large  capital  on  the  same  object There  is  per- 
haps no  manufacturer,  however  rich,  who  limits  his  business  to  the 
extent  that  his  own  funds  will  allow ;  he  has  always  some  portion 
of  this  floating  capital.  When  the  demand  for  silks  increases,  and 
that  for  cloth  diminishes,  the  clothier  does  not  remove  with  his 
capital  to  the  silk  trade,  but  he  dismisses  some  of  the  workmen,  he 
discontinues  his  demand  for  the  loans  from  bankers  and  monied 
men  (Ricardo,  Political  Economy,  chap,   iii,  sec.   33)." 

"  If  further  evidence  is  necessary  that  prevailingly  throughout  eco- 
nomic  discussion   the   working   concept   of  capital   is   the   entrepreneur 


152  VALUE  AND  DISTRIBUTION 

With  the  acceptance  of  this  entrepreneur  concept  of 
capital — an  acceptance  not  to  be  avoided  so  far  as  the  capi- 
tal category  is  to  retain  its  significance  for  cost-of-produc- 
tion  purposes — there  must  evidently  go  the  abandonment  of 
the  threefold  division  of  productive  factors  as  essential  or 
important  in  the  value  analysis ;  for  while  the  technological 
distinctions  may  and  must,  to  a  limited  degree  and  for 
certain  purposes,  hold  their  place,  the  services  of  the  vari- 
ous factors  in  value  production  are,  in  competitive  business, 
reduced  to  the  common  denominator  of  money  price,  stand 
with  regard  to  entrepreneur  outlay  in  an  entirely  indistin- 
guishable relation,  and  are  paid  for  as  costs  out  of  one 
common  fund  of  resources,  the,  capital  fund  of  the  entre- 
preneur. 

All  things,  then,  that  can  be  traded  in,  or  valued,  or 
rented,  or  capitalized,  may  fall  within  the  meaning  of  the 
capital  concept.  In  this  sense  of  the  term,  capital  includes, 
in  the  price  aspect,  patents,  copyrights,  trade-marks,  busi- 
ness connections,  reputation,  good-will,  privilege,  govern- 
ment favor,  franchises,  royalties,  rights  of  toll  and  tribute, 
rents,  annuities,  mortgage  rights,  personal  claims ;  °  and 
further,  it  includes  monopolies  of  no  matter  how  various 

concept,  the  citation  of  authors  to  the  required  degree  is  evidently 
impracticable  here  ;  it  remains  true,  however,  that  economic  literature 
is  full  of  his  concept,  particularly  in  those  directions  showing  the 
strong  influence  of  John  Stuart  Mill,  practically  all  of  whose  cost 
analysis  is  of  the  entrepreneur  type.  But  perhaps  it  may  be  sufficient 
again  to  point  out  that  the  wage-fund  doctrine  would  be  outside  the 
pale  of  possible  discussion  on  any  other  basis  than  this  of  entrepreneur 
capital.  What  force  is  there,  on  any  classical  plane  of  discussion,  in 
calling  subsistence  goods  capital  otherwise  than  from  the  employers' 
point  of  view  ?  Or  what  force  in  the  distinction  between  fixed  and 
circulating  capital  ?  Or  in  the  doctrine  as  expounded  that  labor  is 
limited  by  capital?  At  Mill's  time  it  had  become  no  longer  possible 
to  be  overlooked  that  society  was  in  a  regime  of  employer  production ; 
Mill  accepted  from  the  business  world  the  business  basis  of  reckoning — 
a  computation  according  to  competitive  entrepreneur  costs.  Since 
Mill's  time,  with  the  exception  of  Cairnes's  belated  and  reactionary 
crusade,  there  has  been  practically  no  systematic  cost  doctrine  that  has 
not  sounded  in  terms  of  entrepreneur  cost,  with  its  implied  recognition 
of  the  underlying  concept  of  entrepreneur  capital. 

"  To  deny  the  term  "capital"  to  these  immaterial  value  items,  and 
to  call  them  merely  property,  as  would  (sometimes)  Fetter,  does  indeed 


CAPITAL  AS  A  COMPETITIVE  CONCEPT  153 

kinds  and  degrees,  so  far  as  they  may  become  the  subject 
of  invested  cost  in  obtaining  them,  so  far  as  they  are 
bought  and  sold  as  steps  in  competitive-productive  invest- 
ment, or  are  vendible  upon  the  market  as  capitalized  divi- 
dend-paying properties.  All  of  these  are  capital  for  our 
present  purposes,  the  value  investigation,  since  they  get  into 
costs  in  the  actual  competitive  market  production  of  such 
commodities — hats,  wheat,  machinery,  stocks,  etc. — as  are 
actually  marketed.  All  things  which,  from  the  entrepreneur 
point  of  view,  appear  to  be  expedient  expenditure  for  the 
purposes  of  creating  either  a  commodity  or  a  situation  of 
market  value  are  outlays  of  capital  taking  rank  as  costs  of 
production.  When  the  purchase  of  machinery  is  an  advis- 
able move  in  business  policy,  capital  goes  into  it,  as  at 
another  time  into  land  or  labor;  when,  in  good  busi- 
ness policy,  a  franchise  must  be  had  or  a  patent  procured, 
capital  is,  in  either  case,  so  directed  as  to  accomplish  the 
necessary  thing.  When,  for  equally  cogent  business  rea- 
sons, legislatures  or  city  councils  must  be  bought,  the  neces- 
sary outlays  are,  for  cost  and  value  purposes,  precisely  like 
expenditures  for  machinery  or  for  the  control  of  patented 
processes ;  tramway  franchises  and  sugar-refining  tariffs,  as 
situations  business-wise  obtained  by  the  expenditure  of 
capital,  disclose  in  the  current  market  values  of  the  stock 
the  present  worth  of  the  forecasted  gains.  So  the  expenses 
of  stifling  competition  are  capital  outlays,  invested  as  the 
costs  of  a  monopoly  to  be  obtained ;  so  also  the  tribute  paid 
to  escape  cut-throat  competition  is  a  capital  cost  of  pro- 
duction.'^ 

That  for  purposes  of  competitive  production  the  only 
important  fact  for  cost  is  the  outlay,  and  not  at  all  the 

obviate  any  necessity  for  distinguishing  between  social  and  private 
capital,  but  the  necessity  still  remains  for  doing  something  with  this 
property — a  serious  matter  in  itself,  or  of  excluding  it  from  economic 
consideration — a  still  more   serious  matter. 

^  Cf.  Veblen,  "Modern  Business  Capital,"  The  Theory  of  Business 
Enterprise,  chap.  vi. 


154  VALUE  AND  DISTRIBUTION      . 

direction  of  it — technological  or  other — may  perhaps  be 
made  clearer  if  we  set  ourselves  to  observe  the  different 
ways  in  which  different  entrepreneurs  in  the  same  line  of 
production  go  about  to  achieve  precisely  similar  ends.  Of 
six  farmers,  with  substantially  similar  farms  and  inheriting 
or  borrowing  an  equal  fund  of  purchasing  power,  one  will 
buy  more  land,  another  more  machinery,  a  third  will  hire 
more  labor,  a  fourth  will  buy  more  draft  cattle,  a  fifth  will 
increase  his  herds,  a  sixth  will  enlarge  or  improve  his  sheds 
and  barns ;  but  all  will,  in  essential  similarity,  be  devising 
ways  of  most  gainfully  putting  product  upon  the  market. 
True,  there  would  be  room  enough  here,  were  it  to  the 
purpose,  for  technological  distinctions  between  the  various 
factors  of  production,  but  it  is  clearly  not  to  the  purpose; 
no  one  of  these  productive  outlays  is  any  more  or  any  less 
a  cost  than  any  other ;  and  no  one  of  them  is  a  cost  by  virtue 
of  its  labor  or  its  pain  content,  or  of  its  abstinence  quality, 
but  only  of  its  capital  outlay. 

Lest  the  argument  seem  to  imply  too  much,  or  its  con- 
clusions to  extend  too  far,  it  may  be  permissible  again  to 
repeat  that  no  abandonment  of  the  technological  concept  of 
capital  is  advocated  or  could  be  admitted  to  be  desirable, 
but  only  that  this  technological  concept  be  accepted  as  such, 
and  that  its  distinctly  social  bearing  and  significance  be 
recognized.  Nor  is  any  attack  intended  upon  the  principle 
that,  from  the  social  as  well  as  from  the  individual  point 
of  view,  all  wealth  postponed  in  consumption  is  capital. 
But  it  is  here  insistently  urged  that  the  category  of  private 
capital  must  not  be  abandoned,  but  enlarged  to  be  as  wide 
as  the  concept  of  competitive  capital ;  and  that  this  latter 
concept  needs  not  only  recognition,  but  a  markedly  increased 
emphasis  as  surpassingly  important  among  capital  concepts ; 
and  all  this  to  the  end  that  economics  may  preserve  some 
practical  relation  to  the  actual  business  life  of  a  competitive 
entrepreneur  society.^ 

"  This  concept  of  capital  is  substantially  the  same  as  that  which, 
from  another  point  of  view  and  for  entirely  different  purposes,  is  set 
forth  by   Professor  Veblen  in  his   Theory  of  Business  Enterprise. 


CAPITAL  AS  A  COMPETITIVE  CONCEPT  155 

In  certain  important  particulars  the  foregoing  argument  and  its 
conclusions  are  obviously  at  one  with  the  views  of  Professors  Fetter 
and  Fisher.  Social  capital  one  may  be  content  to  define  in  harmony 
with  Professor  Fetter's  formulation  ;  but  there  must  be  sharp  dissent 
from  the  abandonment  of  the  private-capital  concept.  Professor 
Fetter's  formulation,  while  entirely  adequate  from  the  social  point  of 
view,  and  important  for  theoretical  doctrines  as  viewed  therefrom,  can 
scarcely  be  regarded  as  of  theoretical  adequacy  or  of  practical  service 
when  carried  over  into  the  field  of  existing  facts. 

Nor  does  it  appear  possible  to  work  out  anything  like  approximate 
coincidence,  as  does  Boehm-Bawerk,  between  social  and  private  capital, 
private  capital  being  held  as  somewhat  the  more  inclusive  concept. 
Fetter  and  Fisher  have  sufficiently  shown  the  arbitrary  and  illogical 
character  of  this  procedure.  Private  capital,  if  there  is  any  such  thing, 
is  widely  different  from  a  category  collateral  to  and  supplementary  to 
the  social-capital  concept. 

But  it  is  not  so  clear  whether,  under  Professor  Fisher's  reasonings, 
there  may  not  be  room  for  the  entrepreneur-capital  concept  above  set 
forth.  Certainly  the  citations  from  ante-Smith  usage,  as  well  as  from 
later  usage,  admit,  if  indeed  they  do  not  impose,  the  private  business 
concept ;  e.  g. : 

1612:  "La  sorte  principale  que  e  quella  quantita  di  danari,  che 
pongono  i  mercatanti  in  sui  traifiche." 

1694:  "Le   sorte   principal   d'une   dette." 

161 1  :  "Wealth,  worth:  a  stocke,  a  man's  principal  or  chiefe  sub- 
stance." 

1730:  "Capital  stock  [in  trade,  etc.]  is  the  stock  or  fund  of  a 
trading  company,  or  the  sum  of  money  they  jointly  contribute  to  be 
employed  in  trade."  And  so,  substantially.  Rider,  1759;  Dyche,  1750; 
Nicholson,  1818. 

1859:  "On  donne  vulgairement  ce  nom  a  toute  somme  amasse,  et 
plus  particulierement  a  celles  qui,  placees  ou  pretees,  peuvent  produire 
interet." 

1883  :  "The  amount  of  money  or  property  subscribed  or  employed 
in  a  joint-stock  association  ;  the  money  assets  invested  in  business  by 
a  trading  firm  or  individual ;  the  net  worth  of  a  party." 

The  foregoing  citations  are  all  from  among  those  collected  by 
Professor  Fisher  and  quoted  by  him  in  the  Quarterly  Journal  of 
Economics,  May,   1904  ;  which  see. 

Read  with  the  necessary  bias,  also.  Professor  Fisher's  formulation 
is  wide  enough  to  admit  of  the  entrepreneur  concept :  a  stock  (of  zi'ealth 
or  property,  or  the  value  of  either)  existing  at  an  instant  of  time,  as 
distinguished  from  income,  which  is  a  How  through  a  period  of  time. 
But  inasmuch  as  this  interpretation  would  make  the  formulation  do  duty 
for  two  entirely  distinct  and  inconsistent  concepts,  it  is  perhaps 
not  fairly  to  be  claimed  or  imputed  ;  Professor  Fisher's  point  of  view 
and  reasonings  are  prevailingly  social  in  character.  So  Professor 
Tuttle's  notion,  "surplus  wealth  as  a  possession"  {Quarterly  Journal  of 
Economics,  November,  1903),  appears  to  be  an  unwarrantable  joinder 
of  social  and  competitive  considerations,  or,  perhaps  better,  an  impos- 
sible compromise  between  them. 

In  last  analysis,  however,  the  objections  to  Professor  Fisher's 
view  are  best  appreciated  by  following  out  rigorously  his  distinction 
between  fund  and  flow,  a  distinction  of  unquestionably  great  value, 
but  made  overdecisive  for  the  purposes  in  hand : 


156 


VALUE  AND  DISTRIBUTION 


Capital  and  income  being  made  correlative  terms,  all  flow  being 
income,  and  the  fund  giving  origin  to  the  flow  being  capital,  wages 
thereby  become  a  subhead  of  interest,  and  men,  or  their  productive 
power,  become  capital.  Fisher  himself  accepts  this  conclusion,  but 
recognizes  the  awkwardness  of  it,  and  declines  to  regard  it  as  essential 
to  his  main  position.  But  it  is  none  the  less  true  that  giving  up  this 
point  necessitates  the  abandonment  of  the  fund-t'J.-flow  distinction, 
at   all  events   for   the  main   purpose   to   which   it   is   applied. 

And  there  is  really  insuperable  difficulty  in  the  way  of  making  men 
capital,  if  the  capital  notion  be  taken  to  imply  the  reduction  of  the 
productive  good  to  the  value  denominator  ;  and  this,  it  will  be  remem- 
bered, is  the  view  for  which  Professor  Fisher  has  announced  himself 
to  stand :  "Professor  Fetter  ....  seems  to  think  that  I  restrict  the 
meaning  of  capital  to  concrete  wealth  rather  than  the  value  of  wealth, 
and  that  I  do  not  admit  'services'  under  income.  But  these  are 
both  prominent  theses  of  mine"  {Quarterly  Journal  of  Economics,  May, 
1904,  p.  388,  note).  But  it  is,  then,  impossible  that  men  become  capi- 
tal, inasmuch  as,  while  each  man  does  give  off  successive  productive 
services,  which,  so  far  as  they  are  salable — and  sold — in  advance 
of  their  actual  rendering,  may  each  obtain,  through  the  process  of  dis- 
count, a  present  worth,  it  is  not  possible  to  attach  a  present  worth  to 
the  whole  series  in  block,  that  is  to  the  man  entire  ;  that  the  difficulty 
of  giving  the  successive  doses  of  upkeep  expression  in  present  worth 
is  not  insurmountable,  is  seen  in  the  fact  that  other  productive  agents, 
subjected  to  upkeep  expenses,  obtain  a  net  present  value.  The  diffi- 
culty is  that,  outside  of  slavery,  no  sale  is  possible,  and  that  thereby 
there  is  nobody  to  do  the  capitalizing  ;  free  men  have  no  market  value. 
Precisely  as  nothing  is  property  that  cannot  be  owned,  so  nothing  is 
capital  that  cannot  be  capitalized ;  thus  no  income  can  be  computed 
as  the  flow  from  any  fund,  so  long  as  the  succession  of  incomes  can- 
not be  funded. 

It  would,  indeed,  be  possible,  as  Fisher  rightly  urges,  for  each  or 
any  individual  man  to  capitalize  himself  upon  the  basis  of  what  his 
future  income  was  expected  to  offer  as  gratification  balance  over  and 
above  the  stress  and  burden  of  acquiring  the  income.  But  even  this 
does  not  meet  the  difficulty  ;  for  if  men  are  to  be  capitalized  in  such 
manner  as  to  permit  that  the  concept  of  flow — interest — be  articulated 
with  the  concept  of  fund — capital — it  must,  upon  such  basis,  follow 
that  all  income,  and  not  some  share  or  balance  of  income,  be  taken  as  the 
interest  fact,  and  thereupon  be  subjected  to  the  discount  reduction 
into  terms  of  capital.  Otherwise  it  will  immediately  become  necessary 
that  all  rents  upon  instrumental  or  other  saved  wealth  be  taken  to  be 
capital  only  to  the  extent  that  the  incomes  therefrom  afford  a  net 
return  over  and  above  the  burdens  and  protests  of  postponement. 

Resting  upon  this  view  of  man  as  capital,  debts  and  franchises 
are  by  Fisher  included  within  the  capital  concept,  as  parts  of  the  fund, 
since  they  are  liens  against  men,  mortgage  claims,  so  to  speak,  upon  the 
human-capital  items.  But  if  it  be  not  permissible  to  regard  men  as 
capital,  there  is  logically  no  place  for  choses  in  action,  unless  upon  the 
acceptance  of  the  private-capital  concept — an  outcome  which  both 
Fetter's  and  Fisher's  views  are  especially  recommended  as  avoiding. 


CHAPTER  XII 

COMPETITIVE  SAVINGS  AND  SOCIAL  CAPITAL:   LOAN 
FUND  AND  ABSTRACT  CAPITAL 

We  have  seen  that  the  cost-of -production  and  the  value 
problem  here  has  to  do  not  with  capital  as  a  social  concept 
but  solely  with  competitive  capital,  capital  as  a  fund  for  the 
payment  of  the  expenses  of  production,  capital  conceived  in 
such  wise  that  interest  payments  are  as  correctly  to  be 
regarded  as  paid  from  it  as  for  it,  capital,  that  is  to  say,  as 
the  source  of  rent,  insurance,  tax,  and  advertising  outlays, 
and  of  all  other  costs  of  production  as  well. 

All  this  follows  from  the  truth  that  cost  of  production, 
as  a  category  in  the  investigation  of  market  values  in  a 
competitive  society,  is  purely  a  private  and  competitive  fact. 
Elsewhere  it  may  be  our  task  to  elaborate  categories  of 
social  cost,  cost  as  it  would  present  itself  in  a  collectivist 
economy,  cost  in  terms  of  some  sort  of  social  labor  pain 
or  of  displacement  of  social  product, — cost,  that  is 
to  say,  unrelated  to  private  capital  and  to  competitive 
outlay,  and  entirely  exclusive  of  all  the  computations  and 
the  detail  and  the  organization  of  private  initiative  for 
private  gain. 

But  for  competitive  economics,  and  for  cost  of  production 
as  a  step  in  the  investigation  of  competitive  market  values, 
all  concepts  must  be  competitive  in  character ;  capital  must, 
for  cost  purposes,  be  taken  as  the  fund  out  of  which  pro- 
ductive expenditures  are  paid,  or  as  the  valued  thing  or 
situation  or  agent  into  which  these  capital  outlays  have  been 
incorporated  and  value-wise  expressed. 

It  follows,  then,  that  competitive  capital  will  comprise 
not  merely  machinery  and  tools  and  improvements  upon 
land,  but  also  stocks  in  trade,  and  counter  money,  together 
with  any  and  all  cost-obtained  means  and  agents  of  private 
gain,  land  or  other ;  thus,  diverging  from  the  social  concept 

157 


158  VALUE  AND  DISTRIBUTION 

even  at  its  broadest,  competitive  capital  must  include  such 
non-social  forms  of  wealth  as  debts,  franchises,  trade- 
secrets,  trade-marks,  copyrights,  good-will  influence,  legis- 
lative and  administrative  favor. 

In  sum.  as  has  been  pointed  out  at  length,  the  entre- 
preneur-capital concept  abandons,  as  purely  technological 
and  mechanical  and  as  irrelevant  to  the  computations  of 
competitive  production,  the  traditional  threefold  subdivision 
of  productive  factors;  it  places  all  productive  outlays  as 
upon  the  same  footing  relatively  to  cost  and  to  value,  and 
forsakes  all  attempt  to  make  capital  a  subhead  under  the 
category  of  social  wealth.  Private  capital  must  logically 
stand  as  merely  another  aspect  of  private  wealth. 

But  it  is  to  be  noted  that  there  remains  always  one 
fundamental  likeness  between  social  capital  and  competitive 
capital — the  test  by  virtue  of  which  any  good  or  possession 
considered  from  either  point  of  view  is  entitled  to  be 
regarded  as  capital — the  characteristic  mark  and  the  essen- 
tial fact  in  the  capital  concept,  that  of  postponed  ultimate 
service.  Capital  always  and  everywhere,  be  it  of  the  social 
or  of  the  private  sort,  is  a  case  of  wealth  held  by  the  owner 
thereof  for  the  advantage  accruing  with  time. 

Saving,  then,  means  postponed  service;  always  and 
everywhere  postponed  service  is  the  heart  of  the  capital 
concept.  Privately  postponed  service  is  private  capital ; 
socially  postponed  service  is  social  capital.^ 

Thus  while,  from  the  social  point  of  view,  the  distinc- 
tion between  capital  goods  and  land  goods  might  possibly 
be  rested  upon  either  technological  or  genetic  considera- 
tions, it  is  clear  that,  from  the  competitive  point  of  view, 

'  It  may  be  objected — a  critical  friend  has  indeed  objected — that 
the  ideal  and  unmitigated  miser  postpones  his  consumption  without 
purpose  of  later  consumption,  and  with  the  distinct  purpose  of  mere 
accumulation.  This  must  be  granted  ;  and  it  is  obviously  not  a  satis- 
factory disposal  of  the  case  to  term  it  abnormal,  or  to  put  it  aside  as 
mere  aberration  or  disease.  But  in  reality  no  difficulty  is  presented 
for  the  proposition  advanced,  which  is  merely  that  the  satisfaction 
offered  by  immediate  consumption  will  not  be  foregone  excepting  upon 
terms  of  a  larger  service  obtained  by  way  of  income  due  to  earning 
power  or  through   a  continued  and  prolonged  enjoyment  of  some   sort. 


SOCIAL  AND  ABSTRACT  CAPITAL  i59 

all  questions  of  derivation  and  origin  and  all  questions  of 
probable  or  possible  modifications  of  supply  are  equally 
irrelevant  as  bearing  upon  the  content  of  the  term  capital. 
And  likewise  the  distinction  between  production  and  con- 
sumption goods  takes  on,  under  the  private-capital  con- 
cept, quite  a  different  aspect,  if  indeed  it  does  not  break 
down  altogether.  All  forms  of  merchandise  must  rank  as 
capital ;  rented  pleasure  boats  serve  as  basis  of  acquisition ; 
technological  and  non-technological  goods  fall  equally 
within  the  classification ;  whatever  commands,  for  the  indi- 
vidual, power  of  disposal  over  present  goods  may  be  the 
subject  of  individual  saving — of  postponed  service. 
Whether  this  disposal  rests  upon  the  ownership  of  con- 
crete and  tangible  facts  or  merely  of  some  right  or  privilege 
or  claim,  is  for  the  purposes  of  the  individual  computation 
entirely  irrelevant ;  productivity  for  the  individual  reckon- 
ing is  in  any  case  implied  by  the  very  fact  that  postponement 
of  service  is  decided  upon;  productivity  thereby  assumes  a 
new  aspect ;  and  consumption  goods,  technological  goods, 
and  immaterial  goods  all  take  on,  in  their  time  aspect,  the 
character  of  capital,  as  in  one  way  or  another  income-bear- 
ing, increment-commanding  items  of  ownership. 

Viewed  in  the  light  of  these  considerations,  some  of  the 
confusions,  both  in  earlier  and  in  current  capital  discus- 
sion, come  to  be  readily  explicable;  the  distinction  between 
the  social  and  the  competitive  concepts  has  commonly  been 
but  vaguely  felt  and  never  consistently  worked  out.  Capi- 
tal, in  the  sense  of  a  wage-outlay  fund,  belongs  exclusively 
to  the  competitive  concept ;  capital  as  instrumental  goods 

In  ultimate  analysis  the  miser  is  not  indefinitely  postponing  his  enjoy- 
ment ;  instead  of  this,  he  is  immediately  entering  upon  the  preferable 
alternative    enjoyment,    the    long-time   utility-income    method. 

Likewise  it  is  no  part  of  the  argument  to  insist  that  the  principal 
sum  of  an  investment  must  some  time  be  consumed,  but  only  that  the 
immediate  total  of  satisfaction  offered  by  the  present  utility  of  wealth 
will  be  foregone  only  on  the  expectation  of  a  larger  total  of  service 
through  waiting,  and  that  this  could  fail  to  be  true  only  upon  such 
conditions  as,  making  abstinence  an  indifferent  thing,  must  make 
production  a  motiveless  thing. 


i6o  VALUE  AND  DISTRIBUTION 

falls  equally  well  under  either.  Capital  as  distinguished 
from  other  instrumental  goods — land  and  natural  agents — is 
a  possible  social  and  technological  concept;  but  from  the 
point  of  view  of  private  capital  the  distinction  vanishes. 
Credit  rights,  franchises,  patents,  good-will,  privileges,  have* 
no  existence  in  the  collective  reckoning;  but  as  competitive 
facts  they  are  among  the  most  important  of  acquisitive 
goods.  The  wage-fund  doctrine  is  nonsense  from  the  point 
of  view  of  social  reasonings ;  but  from  the  private  point 
of  view  it  is  an  entirely  tenable,  though  admittedly  a  not 
over-important  or  necessary,  concept.  Subsistence  goods  are 
readily  enough  regarded  as  costs  and  as  production  items, 
if  only  the  private  instead  of  the  collective  standpoint  be 
adopted. 

That  labor  is  limited  by  capital,  taken  in  the  sense  of 
technological  equipment,  is,  if  rightly  interpreted,  hardly 
open  to  question;  but  the  proposition  means  nothing  or 
worse  if  asserted  with  regard  to  private  capital. 

But,  for  our  present  purposes,  the  most  significant  of 
the  conclusions  resulting  from  this  constant  and  chronic 
shifting  in  point  of  view  is  in  the  treatment  of  savings,  loan 
capital,  and  commercial  credits.  Under  what  concept  are 
we,  indeed,  proceeding,  in  our  talk  about  fixed  and  circulat- 
ing capital,  the  great  centers  of  capital,  great  capital  bor- 
rowings, the  growth  of  capital,  the  fluidity  and  mobility  of 
capital?  And  what  is  really  the  relation  between  savings 
and  capital? 

What,  for  example,  is  Ricardo  talking  of  in  the  follow- 
ing passage,  already  quoted  in  part? 

Capital  is  apportioned  precisely,  in  the  requisite  abundance 
and  no  more,  to  the  production  of  the  different  commodities  which 
happen  to  be  in  demand.  With  the  rise  or  fall  of  prices  .... 
capital  is  either  encouraged  to  enter  into,  or  is  warned  to  depart 
from,  the  particular  employment  in  which  the  variation  has  taken 
place.  Whilst  every  man  is  free  to  employ  his  capital  where  he 
pleases,  he  will  naturally  seek  for  it  that  employment  which  is  most 
advantageous;  he  will  naturally  be  dissatisfied  with  a  profit  of  lO 
per   cent.,   if   by   removing   his   capital   he   can   obtain   a   profit   of 


SOCIAL  AND  ABSTRACT  CAPITAL  i6i 

15    per    cent It    is    perhaps    very    difficult    to    trace    the 

steps  by  which  this  change  is  effected :  it  is  probably  effected  by  a 
manufacturer  not  absolutely  changing  his  employment,  but  only 
lessening  the  quantity  of  capital  he  has  in  that  employment.  In  all 
rich  countries  there  is  a  number  of  men  forming  what  is  called  the 
monied  class ;  these  men  are  engaged  in  no  trade,  but  live  on  the 
interest  of  their  money,  which  is  employed  in  discounting  bills,  or 
in  loans  to  the  more  industrious  part  of  the  community.  The 
bankers  too  employ  large  capital  on  the  same  objects.  The  capital 
so  employed  forms  a  circulating  capital  of  a  large  amount,  and  is 
employed,  in  larger  or  smaller  proportions,  by  all  the  different 
trades  of  the  country.  There  is  perhaps  no  manufacturer,  how- 
ever rich,  who  limits  his  business  to  the  extent  that  his  own  funds 
will  allow :  he  has  always  some  portion  of  this  floating  capital, 
increasing  or  diminishing  according  to  the  activity  of  the  demand 
for  his  commodities.  When  the  demand  for  silks  increases,  and 
that  for  cloth  diminishes,  the  clothier  does  not  remove  with  his 
capital  to  the  silk  trade ;  but  he  dismisses  some  of  his  workmen, 
he  discontinues  his  demand  for  loans  from  bankers  and  monied 
men;  while  the  case  of  the  silk  manufacturer  is  the  reverse:  he 
wishes  to  employ  more  workmen,  and  thus  his  motive  for  borrow- 
ing is  increased;  he  borrows  more,  and  thus  capital  is  transferred 
from  one  employment  to  another,  without  the  necessity  of  a  manu- 
facturer discontinuing  his  usual  occupation.^ 

Whence  come  these  sums  that  Ricardo's  manufacturer 
is  borrowing  from  the  moneyed  classes?  It  is  a  common- 
place that  capital  comes  from  saving;  and  it  is  unfortu- 
nately almost  as  much  of  a  commonplace  that  savings  are  in 
the  same  sense  capital.  But  as  we  have  seen,  saving  is 
merely  the  postponement  of  the  consumable  services  of 
private  wealth ;  the  people  who  save,  the  people  whose 
steady  streams  of  contribution  fiow  into  the  loan  market, 
are  ordinarily  merely  receivers  of  income,  who,  having  held 
their  expenditures  below  their  receipts,  have  something  to 
lend.  Their  decision  to  postpone  their  personal  exercise  of 
their  rights  of  consumption  is  carried  into  effect,  either  by 
the  method  of  holding  their  purchasing  power  in  hand  in 
the  form  of  money  or  by  transferring  this  power  to  other 
persons  by  some  direct  or  indirect  method  of  loan.     The 

^  Ricardo,  Political  Economy,  Conner's  edition,  chap,  iv,  sec.  33. 


i62  VALUE  AND  DISTRIBUTION 

borrower,  whether  for  purposes  of  consumption  or  for 
purposes  of  production,  desires  to  obtain  disposal  over  this 
purchasing  power.  It  is  only  as  a  question  of  security  that 
it  at  all  matters  to  the  lender  whether  consumption  goods 
or  raw  material  or  machinery  or  land  or  labor  be  the 
purchased  fact. 

Whether,  as  the  final  outcome  of  individual  saving,  the 
productive  equipment  of  society — its  technological  otitillage 
— will  be  increased,  will  depend  upon  the  direction  in  which 
the  borrowed  purchasing  power  is  applied.  Private  saving, 
by  the  very  fact  of  non-consumption,  ranks  as  private  capi- 
tal ;  but  the  salary  or  other  income  saved  and  lent  may 
never  result  in  either  social  capital  or  social  wealth ;  socially 
considered,  the  case  may  sum  up  as  merely  one  of  substi- 
tuted consumption — as  simply  a  different  distribution  of  the 
consumable  products  of  industry,  which  in  no  way  become 
a  part  of  the  social  technological  equipment. 

But  by  far  the  larger  part  of  this  loan-fund  form  of 
savings  capital  is  not  thus  easy  of  analysis ;  it  is,  neverthe- 
less, essentially  of  the  same  character  of  postponed  con- 
sumption seeking  rental  openings.  Any  owner  of  any  form 
of  private  wealth  may  by  the  sale  of  his  wealth  become  the 
possessor  of  some  of  this  loan-fund  form  of  capital.  By 
obtaining  control  of  some  form  of  purchasing  power, 
whether  money  or  other,  in  which  is  expressed  and  embodied 
his  deferred  right  of  service,  he  becomes  a  fact  of  supply  in 
the  market  for  loan  capital.  Commonly  by  deposit  in  a 
bank,  his  loan-fund  capital  takes  the  form  of  an  assign- 
able demand  right  against  the  bank. 

It  is  doubtless  true  that  the  saving  and  the  lending 
might  possibly  enough  take  place  in  terms  of  concrete 
material  wealth,  instead  of  in  the  form  of  purchasing  power 
into  which  this  wealth  has  been  converted,  were  it  not  for 
a  lack  of  coincidence  between  demand  and  supply  similar  in 
principle  to  that  which  renders  barter  so  im])racticable  as  a 
system  of  exchange.  Either  the  saved  wealth  may  be  in 
the  hands  of  an  owner  unwilling  or  unable  to  grant  credit 


SOCIAL  AND  ABSTRACT  CAPITAL  1 63 

on  any  terms  whatever,  or  the  credit  medium  offered  may 
be  that  of  a  purchaser  not  sufficiently  well  known  or  not 
satisfactorily  approved;  thus,  without  some  credit  inter- 
mediary or  underwriter,  the  purchaser's  medium  of  pay- 
ment fails  of  the  requisite  degree  of  market-ability — is  not 
for  the  purposes  of  the  case  in  hand  a  currency. 

It  is  precisely  at  this  point  that  banking  methods  take 
on  their  great  importance  in  furnishing  an  investment 
opportunity  for  savings,  and  become  also  a  practical  neces- 
sity for  the  converting  of  savings  into  a  fluid  and  effective 
loan  fund.  By  the  discount  of  the  customer's  note  at  the 
bank,  there  is  secured  for  him  a  medium  of  payment  accept- 
able to  the  seller  of  the  property ;  by  the  method  of  check 
transfer  the  seller  then  becomes  himself  a  holder 
of  loan-fund  capital,  precisely  as  if  the  sale  had  been 
made  for  actual  cash,  and  this  cash  thereupon  deposited  in 
bank. 

For  the  purpose  of  making  all  this  clear  and  of  rein- 
forcing the  truth  that  the  existence  and  the  volume  of 
private-savings  capital  have  no  necessary  connection  with 
the  uses  to  which  the  borrower  devotes  the  borrowed  funds, 
and  no  necessary  connection  with  the  total  volume  of 
existing  social  wealth,  the  following  illustration  will  be  of 
service : 

Let  there  be  assumed  an  isolated  community  of  one 
thousand  farmers,  nine  hundred  and  ninety-nine  of  whom 
possess  each  one  thousand  dollars  of  concrete  wealth  in 
farms  and  implements,  at  the  same  time  that  the  thousandth 
man  has  for  sale  $999,000  worth  of  cattle.  If  now  the  capi- 
tal be  sought  wherewith  to  finance  the  building  of  a  rail- 
road, the  project  must  fail;  it  is  true  that  there  is  one 
wealthy  man  in  the  community,  a  man  who  would  gladly, 
on  approved  security,  lend  $999,000  worth — of  cattle. 
But  railroad  construction  cannot  be  financed  on  this  basis, 
unless,  indeed,  to  the  extent  that  the  cattle  can  be  made  to 
serve  as  a  form  of  currency.  The  difficulty  is  not  that  there 


1 64  VALUE  AND  DISTRIBUTION 

is  a  lack  of  wealth  in  the  community,  but  that  this  wealth  is 
not  in  practicably  lendable  form. 

But  if  now  these  cattle  can  be  sold  out  on  credit  among 
these  nine  hundred  and  ninety-nine  farmers,  their  notes 
taken  and  discounted  into  deposit  credits;  or  even  if  against 
these  farmers  there  are  taken  contracts  or  due-bills  or 
acceptances  or  orders  dischargeable  on  demand  in  labor  or 
in  produce,  there  will  forthwith  exist  in  this  society  $999,- 
000  of  loan-fund  capital  of  a  character  suited  to  the  needs 
of  the  enterprise  in  hand. 

And  if  it  be  objected  that  this  really  amounts  to  the 
same  thing  as  lending  the  cattle,  only  that  the  method  is 
roundabout  and  less  simple,  all  this  must  be  admitted,  but 
with  the  important  modification  that  the  other  way  is,  for 
the  purpose  of  capital-borrowing,  an  impracticable  or  even 
an  impossible  method ;  debts  must  exist,  that  is,  collectible 
rights  in  money  or  in  other  forms  of  wealth — for  money  is 
for  many  purposes  only  a  form  of  credit — must  exist, 
before  these  credit  rights  can  be  lent;  and  nothing  else  can 
practicably  be  lent. 

And  there  is  this  still  more  important  modification  also : 
suppose  all  these  cattle  to  have  been,  immediately  after  the 
sale,  swept  away  by  disease;  if  the  debtors  are  still  solvent, 
the  loss  is  theirs  and  not  that  of  the  capitalist ;  they  are  in  the 
aggregate  $999,000  poorer,  but  he  is  as  well  off  as  before, 
and  has  not  a  jot  less  "capital"  to  lend.  That  is  to  say,  the 
volume  of  loan  fund  in  a  society  has  no  direct  or  necessary 
relation — still  less,  proportion — to  the  wealth  of  the  society 
in  question.  It  is  true  that  if  these  farmers  had  nothing  left 
to  pay  with,  the  debts  might  be  uncollectible  and  thereby 
fall  out  of  the  lists  of  capital ;  but  so  also  might  they  not, 
if  only  it  were  still  true  that  the  laws  of  the  society  or  its 
business  code  of  morality  made  the  debts  collectible  in 
terms  either  of  commodities  or  of  services.  A  debt 
that  is  secured  by  character  is  as  good  an  investment  and  as 
truly  capital  as  any  other  debt,  if  only  it  be  really 
as  secure. 


SOCIAL  AND  ABSTRACT  CAPITAL  165 

But  this  is  not  the  whole  doctrine ;  from  the  theory  and 
the  methods  of  discount  banking,  we  are  to  make  some 
further  deductions.  It  is  worth  noting  that  Bagehot,  in 
adopting  to  the  full  the  Ricardian  mix-up  of  the  social- 
with  the  private-capital  concept,  declares  that  capital 
includes  "two  unlike  sorts  of  commodities,  co-operative 
things  which  help  labor,  and  remunerative  things  which 
pay  for  it;"^  and  further  still — in  full  conformity  with 
Ricardo — remarks : 

Suppose  the  corn  trade  to  become  particularly  good,  there 
are  immediately  twice  the  usual  number  of  corn  bills  in  the  bill 
brokers'  cases ;  and  if  of  the  iron  trades,  then  of  iron  bills.  You 
could  almost  see  the  change  of  capital  if  you  could  look  into  the 
bill  cases  at  different  times.* 

But  note  that  Bagehot  does  not  make  it  altogether  clear 
whose  is  the  capital  that  is  changing;  but  it  is  perhaps 
fairly  to  be  assumed  that  he  takes  it  to  be  the  capital  of  the 
lenders. 

Cairnes's  statement  upon  this  point  is  hardly  more  satis- 
factory ;  but  the  loan- fund  variety  of  capital  receives 
equally  distinct  recognition : 

The  existence  of  a  large  amount  of  capital  in  commercial  coun- 
tries in  disposable  form,  or,  to  speak  less  equivocally,  in  the  form 
of  money  or  other  purchasing  power,  capable  of  being  turned  to 
any  purpose  required,  is  a  patent  and  undeniable  fact.  Nor  is  it 
less  certain  that  this  capital  is  constantly  seeking  the  best  invest- 
ments, and  rapidly  moves  towards  any  branch  of  industry  that 
happens  at  the  moment  to  offer  special  attractions." 

^Economic  Studies,  26.  ed.,  p.  55. 

*  Bagehot,  op.  cit,,  p.  45. 

*  Cairnes,  Leading  Principles,  p.   63. 

"Everyone  is  aware  that  England  has  much  more  immediately  dis- 
posable and  ready  cash  than  any  other  country.  But  very  few  persons 
are  aware  how  much  greater  the  ready  balance — the  floating  loan  fund, 
which  can  be  lent  to  anyone  for  any  purpose — is  in  England  than  it  is 
anywhere  else  in  the  world.  A  very  few  figures  will  show  how  large 
the  London  loan  fund  is,  and  how  much  greater  it  is  than  any  other. 
The  known  deposits — the  deposits  of  banks  which  publish  their  accounts 
— are:  in  London  (December  31,  1872),  £120,000,000;  in  Paris 
(February  27,  1873),  £13,000,000;  in  New  York  (February,  1873), 
£40,000,000;  in  German  Empire  (January  31,  1873),  £8,000,000  ;  and 
the   unknown    deposits — deposits   in   banks   which    do    not   publish    their 


1 66  VALUE  AND  DISTRIBUTION 

But  the  interesting  question  still  remains  whether,  when 
the  business  man  has  borrowed  from  a  deposit  creditor  of 
a  bank  a  share  in  this  loan  fund,  this  borrowed 
portion  becomes  a  part  of  the  business  man's  bor- 
rowed capital  and  constitutes  an  addition  thereto. 
Does  the  creation  of  new  capital  take  place  with 
the  coming  into  existence  of  a  new  promise  to 
pay?  It  must  be  agreed  that  the  new  loan  has  worked  no 
deduction  from  the  capital  of  the  lender;  he  now  holds  a 
note  or  a  right  as  valuable  as  was  the  thing  or  right  with 
which  he  parted.  But  has  there  been  here  a  new  creation  of 
capital,  merely  by  the  fact  of  a  larger  volume  of  cash 
purchasing  power?  The  borrower  has  by  assignment  come 
to  hold  a  demand  right  against  the  bank — a  right  obtained 
on  terms  of  creating  against  himself  an  offsetting  and 
equivalent  demand ;  he  has  enlarged  his  cash  bills  receivable 
on  terms  of  increasing  his  time  bills  payable.  If  the  note 
signed  is  a  liability,  this  deposit  credit  appears  to  rank 
for  him  as  a  new  property  acquired  to  correspond ;  it  is  as 
much  an  asset  as  will  be  any  addition  to  his  stock  of 
merchandise  purchased  through  the  intermediary  of  this 
borrowed  deposit  credit.  In  the  language  of  the  business 
world,  he  has  "borrowed  capital"  for  use  in  his  business; 
the  business  now  employs  so  much  the  larger  capital  total. 
And  yet  if  this  deposit  right  is  really  capital,  there  is 
necromancy  somewhere ;  the  lender  also  has  not  diminished 
his  capital  holdings,  but  has  simply  exchanged  debtors. 

Something  like  a  similar  question  arises  where  a  bank 
customer  has  had  discounted  his  own  note  with  the  bank; 
has  he  borrowed  a  share  out  of  the  existing  loan  fund?  If 
not,  is  whatever  he  has  borrowed  properly  to  be  reckoned 

accounts — are  in  London  much  greater  than  those  in  any  other  of 
these  cities.  The  bankers'  deposits  of  London  are  many  times  greater 
than  those  of  any  other  country." — Bagehot,  Lombard   Street,   chap,   i, 

P-  4- 

A  well-informed  estimate  in  1895  placed  the  bank  deposits  of 
Great  Britain  at  £700,000,000.  In  the  United  States  at  present  the 
deposit  liabilities  of  the  national  banks  alone  run  upwards  of  four  and 
one-half  billions  of  dollars. 


SOCIAL  AND  ABSTRACT  CAPITAL  167 

capital?  Has  he  increased  his  capital  investment?  or  his 
capital  utilized  in  his  business?  What  has  really  taken 
place  ? 

Much  confusion  may  be  avoided  by  getting  firm  grasp 
of  the  truth  that  a  bank  characteristically  does  not — prac- 
ticably speaking,  cannot — lend  its  deposits.  Not  that  the 
money  deposited  might  not  be  lent,  instead  of,  as  is  the 
more  common  case,  being  retained  as  part  of  the  cash 
resources  of  the  bank.  But  even  so  much  as  this  can  be 
true  only  where  the  deposit  is  in  the  form  of  actual  money. 
Conceiving  of  the  bank  system  as  an  aggregate,  deposits 
come  mostly  to  be  regarded  as  mere  transfers  of  credit 
from  one  branch  to  another;  the  clearing  system  is  an 
effective  demonstration  of  this.  In  any  case,  however, 
deposits  in  the  sense  of  demandable  rights,  as  distinguished 
from  the  thing  deposited — customers'  accounts,  the 
things  which  total  for  so  large  a  part  in  the  aggregate  bank- 
ing liability — are  made  up  of  something  not  within  the 
disposal  of  the  bank  to  lend,  but  solely  within  the  disposal 
of  the  depositing  customer.  Commonly,  indeed,  the 
deposit  liability  running  against  the  bank  is  the  outcome  of 
banking  accommodations  already  given;  by  just  so  much 
it  is  a  diminution  from  the  accommodations  remaining 
possible.  The  lending  power  derivative  from  the  accom- 
modations already  granted  is  that  of  the  deposit  customers. 
But  in  any  case,  from  whatever  source  the  deposit  liability 
arises,  not  it — not  the  liability,  but  the  deposited  money, 
if  there  be  any,  is  the  only  thing  lendable  by  the  bank, 
or  usable  as  reserve  basis  for  further  lending.  And  com- 
monly, as  we  have  seen,  no  money  is  deposited,  but  only 
an  item  of  account  against  some  other  bank — a  right  of 
defense  against  other  claims  upon  which  the  other  bank, 
debtor  in  the  case  in  hand,  is  creditor. 

The  rationale  of  borrowing  from  a  bank  is,  as  is 
familiarly  known,  quite  other  than  the  borrowing  of  money. 
True  enough,  money  may  be  borrowed,  but  this  is  unusual 
and  incidental — or  accidental — and,  so  far  as  it  occurs,  is 


l68  VALUE  AND  DISTRIBUTION 

precisely  similar  to  non-bank  borrowing;  it  is  no  part  of 
that  which  is  peculiar  to  banking  methods  and  pertinent  to 
banking  theory.  The  transaction  of  discount  and  deposit 
is  typically  not  a  lending  of  cash ;  it  is  commonly  described 
as  a  lending  by  the  bank  of  its  credit,  either  in  the  guise  of 
deposit  credit,  or  of  bank  bills.  In  exchange  for  this 
demand  right  the  customer  gives  his  note  which,  whether  in 
form  a  demand  or  a  time  obligation,  is,  in  fact,  more  or 
less  pronouncedly,  a  time  relation.  The  case  has  the 
appearance  of  a  mere  interchange  of  obligations,  the  cus- 
tomer passing  over  one  which  is  not  generally  acceptable  as 
current  purchasing  power,  and  receiving  one  which  is  so 
current. 

Making  no  question  of  the  correctness  of  this  view  so 
far  as  it  goes,  it  is  nevertheless  to  be  said  that,  despite  all 
the  machinery  and  the  terminology  of  the  case  to  the  con- 
trary, all  that  the  bank  really  does  is  to  underwrite  the 
credit  of  the  customer ;  it  lends  its  own  credit,  truly,  but 
only  in  the  sense  of  adding  its  guarantee  to  the  customer's 
undertaking  to  pay. 

It  therefore  follows  that  the  na'ive  business  view  of 
"bank  capital"  obtained  through  borrowing  misconceives 
the  facts ;  the  process  is  merely  writing  over  into  acceptable 
purchasing  power  the  business  man's  own  note.  The  result 
may  obviously  be  to  place  the  business  man  in  the  posses- 
sion of  goods  obtained  on  this  underwritten  credit ;  and  for 
present  purposes  it  possibly  does  not  greatly  matter  whether 
the  man's  personal  credit  is  itself  called  the  capital,  or 
whether  the  pass-book  claim,  or  the  demand  note  against 
the  bank,  be  regarded  as  the  capital,  or  whether  finally  the 
goods  obtained  through  the  expenditure  of  the  purchasing 
power  be  regarded  as  the  capital.  It  remains  true  that  in 
any  case  the  business  man's  total  investment,  in  the  sense 
of  his  net  "worth,"  is  not  increased. 

But  whatever  the  terminology  for  all  this  may  be  and 
however  unclear  the  merits  of  the  case  as  matter  of  termi- 
nology, this  much  comes  to  stand  forth  clearly :  whatever 


SOCIAL  AND  ABSTRACT  CAPITAL  169 

else  has  or  has  not  been  increased  by  the  process  of  dis- 
counting a  note,  the  supply  of  loan  funds,  the  media  for  the 
making  of  exchanges  or  for  the  financing  of  enterprises,  the 
borrowable  and  lendable  and  usable  current  purchasing 
power  of  the  community,  has  been  increased.  The  creation 
and  issue  of  current  purchasing  power  is  the  chief  business 
of  banking  institutions.  Loan  funds — it  begins  to  look  as 
if  for  some  share  of  these  the  term  capital  is  of  doubtful 
propriety — are  even  more  intangible  and  incorporeal  than 
savings  capital,  since  not  all  of  the  loan  fund  has  even  as 
much  as  a  previous  saving  behind  it;  but  such  as  they  are, 
bank-made  loan  funds  must  be  recognized  as  intangible  and 
incorporeal  facts,  a  sheer  matter  of  intricacy  and  com- 
plexity in  business  relations — meshes  of  obligation — a  mere 
scaffolding  of  promises — a  folding  back  one  upon  another 
of  successive  layers  of  credit.  And  because  not  necessarily 
representative  of  an  increase  of  social  capital  or  even  of  the 
liquidated  total  of  private  capital,  it  seems  necessary  to 
recognize  the  loan  fund  as  a  distinct  economic  category. 

Some  important  conclusions  now  require  attention  as 
to  the  nature  of  much  of  what  is  called  circulating  capital, 
and  as  to  the  qualities  of  mobility  and  fluidity  said  to  be 
especially  characteristic  of  capital  as  against  land  or  labor, 
and  finally  also  as  to  the  interpretation  and  the  limitations 
to  be  imposed  upon  the  doctrine  of  abstract  capital  and  of 
capital  as  an  abstract  fund. 

From  the  social  point  of  view  all  technological  goods  and 
indeed  all  social  wealth  have,  in  varying  degrees,  the  quality 
of  fixedness.  But  from  the  private  point  of  view  all  capital 
is  mobile,  since  all  wealth  facts  are  salable,  and  since  all 
wealth  is  capital  in  the  measure  and  degree  of  its  market 
price.  From  the  private  point  of  view,  therefore,  every 
possession,  whether  commodity  or  right,  may  be  the  subject 
of  abstinence,^  and  this  without  reference  to  the  degree  of 

*  See  note  on  Senior,  p.  137. 


lyo  VALUE  AND  DISTRIBUTION 

its  fixedness,  when  regarded  from  the  point  of  view  of  its 
technological  adaptation,  or  of  its  quality  as  a  consumption 
good.  Complete  mobility  for  private  purposes  is,  how- 
ever, achieved  only  by  the  transformation  of  the  vendible 
item  of  private  wealth  into  the  form  of  money  or  of  other 
current  disposable  purchasing  power — that  is  to  say,  into 
the  very  commercial  material  or  medium  of  which  the  loan 
fund  is  composed.^ 

It  should  now  be  possible  to  estimate  how  great  is  the 
promise  of  service  and  how  serious  the  admixture  of  error 
presented  by  the  abstract-capital  concept. 

Looked  at  from  the  social  point  of  view,  there  is  no  such 

^  Approached  in  this  wise,  the  differences  between  Smith  and 
Senior,  on  the  one  side,  and  Ricardo  and  James  Mill  upon  the  other, 
with  regard  to  the  nature  and  characteristics  of  circulating  and  of 
fixed  capital,  are  seen  to  be  merely  differences  in  the  choice  of  point 
of  view.  And  here,  as  commonly,  when  Smith  and  Ricardo  were 
clearly  and  definitely  at  issue.  Smith  had  the  right  of  the  controversy. 
Smith  was  advocating  the  private-competitive  point  of  view,  while 
Ricardo's   line   of  distinction   was   prevailingly  technological. 

According  to  Smith,  "Capital  employed  ....  in  such  .... 
things  as  yield  a  revenue  of  profit  without  changing  masters  or  circu- 
lating any  farther   ....   may  properly  be  called  fixed  capital 

Circulating  capital  ....  is  constantly  going  ....  in  one  shape 
and  returning  ....  in  another,  and  it  is  only  by  means  of  such 
circulation,    or    successive    exchanges,    that    it    can    yield   ....   any 

profit Circulating  capital  is  composed  of  four  parts 

First,  of  the  money  by  means  of  which  all  the  other  three  are  circu- 
lated and  distributed ;  ....  of  the  stocks  of  provisions  in  the 
possession  of  the  butcher,  the  grazier,  etc. ;  ....  of  the  materials 
whether  altogether  rude  or  more  or  less  manufactured ;  ....  of 
the  work  ....  made  up  and  completed  but  still  in  the  hands 
of   ...    .   the   manufacturer." — Wealth   of  Nations,   Book   II,    chap.   i. 

So,  with  Smith,  a  tailor's  needles  are  fixed  capital  no  matter  how 
short-lived  of  service.  The  question  is  how  the  wealth  is  actually 
handled  under  the  guidance  of  private  interests  with  reference  to  the 
marketing  of  it — a  matter  of  change  of  ownership. 

With  Ricardo  the  question  is  one  of  mechanical  and  technological 
durability :  "According  as  capital  is  rapidly  perishable,  and  requires  to 
be  frequently  produced,  or  is  of  slow  consumption,  it  is  classed  under 
the  heads  of  circulating  or  of  fixed  capital." — Political  Economy, 
chap,  i,  sec.  4. 

Senior  sides  with  Smith :  "Mr.  Ricardo  might  well  remark  that 
the  line  of  demarcation  between  the  two  sorts  of  capital  cannot  be 
accurately  drawn ;  for  what  can  be  more  vague  or  more  void  of  posi- 
tive meaning  than  such  comparative  terms  as  slow  and  rapid  ?  The 
singular   circumstance    is   that   both   he   and    Mr.    [James]    Mill    should 


SOCIAL  AND  ABSTRACT  CAPITAL  1 71 

thing  as  abstract  capital  in  any  other  sense  than  that 
according  to  which  all  social  wealth  is  subject  to  the  value 
measure  and  is  wealth  or  capital  under  this  test  and  measure 
and  expression.  And  neither  from  the  social  nor  from  any 
other  point  of  view  is  there  any  "spiritual  essence"  of 
value  hovering  over  the  material  forms  of  capital ;  nor  from 
the  social  point  of  view,  or  of  necessity  from  the  private 
point  of  view,  is  it  true  that  material  things  perish  or  wear 
out,  while  the  capital  ghost  of  them  is  immortal ;  there  is,  in 
fine,  no  capital  entity  as  distinct  from  the  capital  goods 
themselves,  though  there  is  such  a  thing  as  the  sum  of  the 
values  of  existing  capital  goods.  This  value  or  price  aspect 
of  the  goods  is  to  be  regarded  as  the  attribute  or  character- 
have  supposed  ....  that  their  division  followed  that  of  Adam  Smith, 
It  is  obviously  a  cross  distinction." — Senior,  Political  Economy,  2d  ed., 
pp.  62-73. 

John  Stuart  Mill's  use  of  the  two  terms  hopelessly  confuses  tech- 
nological and  competitive  considerations:  "Of  the  capital  engaged  in 
the  production  of  any  commodity,  there  is  a  part  which,  having  been 
once  used,  exists  no  longer  as  capital  ;  is  no  longer  capable  of  rendering 
service  to  production,  or  at  least  not  the  same  service  nor  to  the  same 

sort  of  production    [a  technological   distinction] In  the   same 

division  must  be  placed  the  portion  of  capital  which  is  paid  as  the 
wages,  or  consumed  as  the  subsistence  of  laborers.  That  part  of  the 
capital  of  the  cotton-spinner  which  he  pays  away  to  his  work-people, 
once  so  paid,  exists  no  longer  as  his  capital,  or  as  a  cotton-spinner's 
capital.  [Italics  the  present  writer's.  The  money  never  had  any 
technological  quality ;  the  reasoning  is  purely  competitive,  bearing  on 
private — entrepreneur — costs.]  Such  portion  of  it  as  the  workmen 
consume  [money?]  no  longer  exists  as  capital  at  all  ;  .  .  .  .  capital 
which  in  this  manner  fulfils  the  whole  of  its  office  in  the  production  in 
which  it  is  engaged,  by  a  single  use    [technological  aspect  and  private 

aspect  mixed  and  confused]   is  called  circulating  capital This 

portion  of  capital  requires  to  be  constantly  renewed  by  the  sale  of  the 
finished  product,  and  when  renewed  is  perpetually  parted  with  in  buying 
materials  and  paying  wages  ;  so  that  it  does  its  work,  not  by  being  kept 
but  by  changing  hands.  [Mixed  concept;  rests  in  part  upon  considera- 
tions of  durability,  in  part,  of  changes  of  ownership.]  Another  large 
portion  of  capital  consists  of  instruments  of  production,  of  a  more  or 
less  permanent  character,  which  produce  their  effect  not  by  being  parted 
with  but  by  being  kept,  and  the  efficiency  of  which  is  not  exhausted  by 
a  single  use."  [Mixed  concept ;  rests  in  part  on  durability,  in  part  on 
non-change  of  ownership.] — Mill,   Principles,   Book   I,   chap,  vi,    sec.   i. 

For  proof  that  this  same  confusion  between  the  social-technological 
and  the  private-acquisitive  point  of  view  is  equally  characteristic  of 
late  and  current  discussion,  reference  may  be  had  to  an  article  by  the 
present  writer  published  in  the  Yale  Revieiv  for  November,  1905,  entitled 
"Doctrinal  Tendencies — Fetter,   Flux,   Seager,   Carver." 


172  VALUE  AND  DISTRIBUTION 

istic  by  which  and  according  to  which  the  goods  possess  the 
capital  qiiahty.^ 

But  from  the  point  of  view  of  private  competition  and 
competitive  business,  the  only  point  of  view,  be  it  repeated, 
which  greatly  concerns  economic  theory  in  general  or 
which  at  all  concerns  the  cost  and  value  investigation,  the 
question  takes  on  a  different  aspect;  here  all  capital,  by 
virtue  of  its  quality  of  vendibility  is,  in  a  sense,  unspecial- 
ized,  mobile,  and  fluid;  and  all  stocks  of  materials  and  all 
intermediate  products  are,  as  such,  mobile  in  their  varying 

^  From  this  social  point  of  view,  therefore,  Professor  Carver's 
analysis  of  the  abstract-capital  concept  leaves  nothing  to  be  said : 
"The  effort  to  distinguish  between  capital  and  capital-goods  seems  to 
be  simply  an  attempt  to  distinguish  between  a  quantitative  measurement 
for  capital  and  the  capital  itself.  Things  are  measured,  of  course,  by 
selecting  a  single  property  which  they  possess  in  common,  such  as 
number,  extension,  or  specific  gravity,  and  comparing  them  on  the  basis 
of  this  property.  When  we  want  to  say  how  much  there  is  of  a  certain 
thing,  we  express  it  in  terms  of  the  property  according  to  which  it  is 
commonly  measured.  This  is  true  of  wealth  and  capital  as  of  other 
things.  The  primitive  herdsman,  if  asked  the  amount  of  his  wealth, 
would  doubtless  have  answered  an  hundred  or  two  hundred  head,  as  the 
case  might  be.  The  primitive  agriculturalist,  whose  wealth  consisted 
of  wheat,  might  have  answered  in  terms  of  cubic  contents,  as  so  many 
bushels.  It  is  conceivable,  though  improbable,  that  both  might  have 
united  upon  specific  gravity  as  the  basis  of  measurement,  and  have 
answered  in  pounds.  But  the  change  to  specific  gravity  as  the  basis 
of  measurement  and  quantitative  expression,  would  not  have  changed 
one  bit  the  nature  of  their  wealth  or  their  capital.  Nor  would  it  have 
made  either  clearer  or  less  clear  the  distinction  between  capital  and 
capital-goods. 

"As  a  matter  of  fact,  value,  being  the  one  property  common  to  all 
forms  of  wealth,  has  long  since  been  selected  as  the  property  accord- 
ing to  which  all  wealth  is  to  be  measured,  and  in  terms  of  which 
quantities  of  wealth  are  always  to  be  expressed.  When  asked  how 
much  wealth  they  have,  men  will  reply,  so  many  dollars,  just  as  the 
herdsman  would  have  enumerated  his  animals.  Capital,  being  a  form 
of  wealth,  is  measured,  and  its  quantity  is  expressed,  in  precisely  the 
same  way.  Does  this  change  in  the  basis  of  measurement  change  in  the 
slightest  degree  the  nature  of  capital  ?  By  no  means.  When  asked  how 
much  capital  they  have,  men  will  express  it  in  dollars  ;  but,  if  asked  in 
what  their  capital  consists,  they  will  enumerate  the  instruments.  The 
instruments  are  the  capital,  and  the  amount  of  value  in  them  is  not  the 

capital Every    distinction    which    Professor    Clark    has    made 

between  capital  and  capital-goods  can  be  made  with  equal  clearness  and 
with  equal  justice  between  the  herdsman's  hundred  head  and  the 
animals  composing  it,  between  the  farmer's  bushels  and  the  wheat  which 
they  contain,  or  between  the  pounds  of  wealth  on  the  one  hand,  and  the 
animals  and  wheat  on  the  other." — Quarterly  Journal  of  Economics, 
Vol.  XV  ([August,   1901),  p.  589. 


SOCIAL  AND  ABSTRACT  CAPITAL  i73 

degrees ;  and  even  so-called  fixed  capitals,  technological 
instrumental  goods,  are  mobile  in  more  or  less  retarded 
movement,  accordingly  as  there  is  or  is  not  a  ready  market 
for  them." 

It  is  not,  however,  true  that  abstract  capital  at  all  coin- 
cides in  volume  with  the  price  expression  of  the  aggregate 
of  social  capital  or  of  social  wealth;  the  characteristics  of 
abstractness,  of  homogeneity,  of  an  entire  fluidity  and 
mobility,  belong  to  what  we  have  described  as  the  loan 
fund,  and  to  it  solely.  Nor  is  the  size  of  this  fund  com- 
mensurate with  the  existing  fund  or  total  of  private  capital ; 
the  loan  fund  is  merely  a  portion  or  subdivision  of  private 
capital.  Nor,  as  we  have  seen,  is  the  loan  fund  made  up 
of  claims  resting  for  their  collectibility  solely  upon  some 
existing  form  of  social  wealth  or  capital ;  purely  personal 
claims,  if  they  are  enforceable,  are  as  truly  capital  as  are 
rights  secured  by  collateral  or  by  mortgage ;  many  debtors 
put  in  pledge  their  future  earning  power,  precisely  as  may  a 
state  its  future  revenues.  So,  also,  precisely  as  the  present 
value  of  a  city  corner  is  the  discounted  value  of  the  trade 
privileges  which  it  will  in  the  long  future  control,  so  the 
good-will  of  a  business,  and  the  market  value  of  that  good- 

*  The  private  reckoning  being  solely  concerned  with  the  price  aspect 
of  the  case,  there  is,  from  this  point  of  view,  in  the  abstract-capital 
doctrine,  a  residuum  of  truth  not  quite  adequately  recognized  in  Pro- 
fessor Carver's  analysis  as  it  continues :  "As  to  the  permanence  of 
capital.  Does  capital  abide  while  capital-goods  perish,  or  is  it  only  the 
quantitative  expression  for  capital  which  remains,  while  capital,  the 
thing  measured,  perishes?  Evidently,  the  latter.  Though  animals 
perish,  the  amount  of  the  herdsman's  wealth,  measured  numerically  and 
expressed,  for  example,  as  an  hundred  head,  may  remain.  Is  it  the 
same  wealth  ?  Not  unless  it  is  the  same  hundred  head.  Though  wheat 
perishes,  the  amount  of  the  farmer's  wealth,  measured  in  cubic  contents 
and  expressed,  for  example,  as  a  thousand  bushels,  may  remain.  Is 
it  the  same  wealth?  Not  unless  it  is  the  same  thousand  bushels. 
Though  animals  and  wheat  perish,  the  wealth  of  both  farmer  and  herds- 
man, measured  on  the  basis  of  specific  gravity  and  expressed,  for 
example,  as  ten  thousand  pounds,  may  remain.  Is  it  the  same 
wealth  ?  Not  unless  it  is  the  same  ten  thousand  pounds.  Though  goods 
of  all  kinds  perish,  the  amount  of  wealth,  measured  on  the  basis  of 
value  and  expressed  in  dollars,  may  remain.  Again,  is  it  the  same 
wealth  ?  The  things  measured,  whose  quality  is  expressed  in  dollars, 
are  evidently  not  the  same  ;  and  it  is  only  by  confusing  the  measure  for 
the  thing  measured  that  it  can  be  said  to  be  the  same  wealth," 


174  VALUE  AND  DISTRIBUTION 

will,  may  rest,  in  large  part,  on  the  prospect  of  business 
relations  some  day  to  be  established  with  human  beings  not 
yet  born;  the  situation  is  none  the  less  a  present  asset  in 
private  capital.  The  essential  and  important  kernel  of  truth 
in  the  abstract-capital  concept  is,  then,  the  obscure  recogni- 
tion of  the  loan-fund  fact.  Abstract  capital  is  a  subhead 
under  the  private-capital  concept,  a  competitive  and  not  a 
social  fact,  a  share  and  only  a  share,  out  of  the  private- 
capital  aggregate.^'' 

"  That  for  theoretical  as  well  as  for  practical  purposes  there  is 
something  at  issue  here  will  be  evident  from  the  following  quotation 
from  an  address  by  Professor  Joseph  French  Johnson,  delivered  before 
the  Pennsylvania  Bankers'  Association  during  the  year  1905  : 

"The  rate  of  interest  in  the  last  analysis  has  no  relation  what- 
ever to  the  quantity  of  gold  in  the  country.  It  is  the  product  of  the 
demand  for  and  the  supply  of  capital.  This  word  capital  is  used  by 
the  economists  to  mean  all  those  forms  of  wealth  which  are  used  in 
production  of  more  wealth  ;  such  for  example,  as  machinery  and  raw 
materials.  It  includes  all  those  goods  which  are  not  consumed  directly, 
but  which  are  used  to  produce  things  which  people  desire.  Among 
business  men  and  bankers  the  word  has  a  different  meaning.  It 
denotes  a  loanable  fund  for  use  in  business,  and  consists  in  money  and 
credit  in  various  forms.  It  is  important  for  us  to  see  that  the  business 
men  and  the  economists  both  have  in  mind  the  same  thing  when  they 
use  the  word  capital.  The  loanable  funds  in  the  possession  of  banks 
are  all  derived  from  the  loanable  capital  in  the  country.  When  the 
amount  of  loanable  capital  increases,  the  amount  of  loanable  funds 
increases  in  a  corresponding  degree  ;  and  there  can  be  no  increases  of 
loanable  funds  brought  about  in  any  other  way.  Banks  create  nothing. 
All  their  lending  power  is  the  product  of  industry.  Every  deposit  of 
money  or  credit  in  a  bank  represents  actual  wealth  or  capital  that  has 
been  saved  in  a  community.  The  loanable  capital  and  the  loanable 
funds  in  a  country  are  practically  the  same  thing  ;  the  one  a  hetero- 
geneous mass  of  value  in  the  form  of  various  goods ;  the  other  the 
same  mass  of  value  made  homogeneous  by  the  universal  solvent, 
money," 


CHAPTER  XIII 
THE    STANDARD    OF    DEFERRED    PAYMENTS 

The  purpose  of  the  isolated  producer  is  the  production 
of  utiHty.  Precisely  the  same  statement  holds,  in  a  com- 
petitive society,  for  the  producer  under  specialization  of 
employments ;  but  all  these  utility  ends  are,  in  this  case, 
worked  out  through  the  intermediary  of  market-value 
adjustments;  from  the  point  of  view  of  the  final  trade — the 
consumer's  point  of  view — not  valuable  things  but  useful 
things  are  of  ultimate  importance ;  gain  in  utility  is  the  sole 
motive.  What  one  pays  less  for  a  thing  than  he  would,  if 
necessary,  have  paid, — what  the  thing  is  good  for  more  than 
it  has  cost,  the  quasi-rent  of  purchase, — while  statable  in 
money,  must  yet  finally  resolve  itself  into  goods  obtainable 
through  money.  Likewise  the  cost  outlay  is  to  the  producer 
ultimately  a  utility  or  disutility  magnitude  rather  than  a 
value  magnitude.  Producers  at  the  margin,  like  traders 
at  the  margin,  are  such  by  the  fact  that  the  utility  in  prospect 
and  the  utility  sacrificed  are  at  balance, — are  at  a  ratio,  one  to 
the  other,  of  unit  value, — and  all  this  irrespective  of  how 
greatly,  for  the  different  marginal  traders  respectively,  the 
absolute  magnitudes  of  the  balancing  services  and  sacrifices 
may  diverge — irrespective,  that  is  to  say,  of  whether  the 
marginal  case  present  a  ratio  of  5  to  5,  or  of  2  to  2,  or  of 
1/2  to  y2,  provided  all  the  while,  of  course,  that  even  this 
much  of  comparability  may  be  assumed  between  the  feeling 
magnitudes  of  different  men.     (See  page  300.) 

In  view  of  this  obvious  fact  that  exchange  is  ultimately, 
in  individual  motive,  a  problem  of  comparison  between 
alternatives  of  utility,  that,  for  either  trader  in  an  exchange, 
the  case  can  have  no  other  significance  than  this  of  utility, 
and  that  market  values  are  mere  price  relations — exchange 
relations — between  things  of  service,  that  is,  between  goods 

17s 


1 70  •      VALUE  AND  DISTRIBUTION 

subjectively  viewed, — the  invitation  is  strong,  the  temptation 
great,  the  promise  alluring,  for  the  resolution  of  market 
values  into  a  common  denominator  of  utility,  and  thereby 
for  somehow  inferring  a  determination  of  value  by  utility 
as  expressed  in  terms  of  this  common  denominator. 

But  the  attempt  is  foredoomed  to  failure.  It  is  one 
thing  to  assert,  with  Say,  that  utility — desire,  want,  need — is 
the  basis,  through  individual  bidding,  of  the  whole  value 
phenomenon — the  cause,  the  motive,  and  the  explanation  of 
price  offer ;  but  it  is  quite  another  and  a  different  thing  to 
assert,  as  sometimes  Say  appears  almost  to  do,  that  all 
market  values  can  be  resolved  into  this  general,  homogene- 
ous, underlying  utility  jelly,  or  utility  denominator.  The 
impossibility  of  all  this  was  clear  enough  to  Ricardo,  though 
it  was  not  clear  just  why.    He  says  in  a  letter  to  Malthus : 

He  ,[Say]  certainly  has  not  a  correct  notion  of  what  is  meant 
by  value  when  he  contends  that  a  commodity  is  valuable  in  propor- 
tion to  its  utility.  This  would  be  true  if  buyers  only  regulated  the 
price  of  commodities.^ 

But  inasmuch  as,  in  Ricardo's  view,  producers  and  not 
buyers  regulate  price,  Ricardo  inclines  to  make  value  pro- 
portional to  labor — in  the  sense  of  labor  pain — failing  to  see 
that  neither  utility  for  different  consumers,  nor  labor  for 
different  producers,  can  be  made  homogeneous  volumes. 
But  notice  once  again  that  Ricardo  does  not  assert  the 
determination  of  the  value  of  the  product  by  the  value  of 
the  labor,  or  even  that  there  is  any  primary  value  in  labor ; 
he  merely  asserts  the  proportionality  of  value  to  labor 
content : 

Our  differences  are  becoming  rather  verbal  than  substantial. 
Your  chapter  on  value  has,  in  my  opinion,  gained  considerably. 
You  misrepresent  me,  however,  on  that  subject  when  you  say  I 
consider  the  value  of  labor  to  determine  the  value  of  commodities. 
I  hold,  on  the  contrary,  that  it  is  not  the  value,  but  the  comparative 
quantity  of  labor  necessary  to  production  which  regulates  the  rela- 
tive value  of  the  commodities  produced.^ 

'  Letters  of  David  Ricardo  to  Thomas  Robert  Malthus,  1810, 
1828,  James  Bonar,  Oxford,   1887,  p.  173. 

*  Ricardo   to   Say,    November   9,    1819,   p,    165. 


THE  STANDARD  OF  DEFERRED  PAYMENTS        177 

Whether  Say  also  may  not  in  some  passages  be  reason- 
ably interpreted  to  assert  more  than  the  mere  proportion- 
ality of  value  to  utility,  and  to  have  attempted  to  give  to 
value  a  measurement  in  some  sort  of  homogeneous  utility 
medium,  may  not  be  clear;  but  he,  in  terms,  asserts  only 
the  measurement  of  utility  by  value.  Thus  on  December 
2,  1815,  he  writes  to  Ricardo : 

You  accuse  me  of  saying  that  utility  is  the  measure  of  value. 
I  thought  I  had  always  said  that  the  value  that  men  attach  to  a 
thing  is  the  measure  of  the  utility  that  they  find  in  it. 

And  on  July  19,  1821,  with  regard  to  the  use  of  labor 
as  a  measure  of  value,  a  measure  which,  as  we  have  seen, 
Ricardo  had,  with  some  misgiving,  adopted,  as  the  best 
at  hand,  but  yet  not  altogether  adequate,  Say  writes : 

There  are  multitudes  of  different  qualities  of  labor;  the  quan- 
tity of  each  of  these  qualities  cannot  be  measured.  I  measure  the 
utility  incorporated  in  the  product  by  the  different  quantities  of 
another  product  which  one  would  pay. 

But  this  seems  to  measure  the  utility  of  one  thing  by  the 
utility  of  another,  or,  what  is  worse  yet,  by  the  mere  quantity 
of  another,  which  quantity  is  but  a  mere  restatement  of  the 
sheer  market  fact  of  the  relation.  And  Say  explains  the 
difficulty  that,  with  gold  and  iron  equal  in  utility,  or  even 
with  iron  the  more  useful,  volume  for  volume,  the  iron  has 
only  1/2000  part  of  the  value  of  gold, — by  saying  that 
1999/2000  of  the  iron  utility  is  free  goods,  a  gratuity  of 
nature. 

None  of  this  helps  much.  But  it  seems  fair  to  say  that 
if  value  and  labor  are  somehow  always  in  proportion,  it 
must  follow,  as  Ricardo  held,  that  labor  may  measure  value, 
as  it  may  equally  well  follow  that  value  may  measure 
labor,  and  all  this  irrespective  of  whether  the  labor  has  any 
primary  and  non-derivative  value  of  its  own;  if  not,  the 
proposition  may  be  correctly  held ;  it  simply  awaits  expla- 
nation of  its  mystery.  Ricardo  left  the  proposition  substan- 
tially a  mystery.^ 

^  And  the  socialists  mostly  accept  it  as  such,  and  leave  it  there : 
"Whenever  by  an  act  of  exchange  we  equate  as  values  our  different 
products,  by  that  very  act  we  also  equate,  as  human  labor,  the  different 
kinds  of  labor  we  expended  upon  them.  We  are  not  aware  of  this ; 
nevertheless  we  do  it.  Value,  therefore,  does  not  stalk  about  with  a 
label   describing  what   it   is.     It  is  value,   rather,   that  converts   every 


1 78  VALUE  AND  DISTRIBUTION 

Likewise,  if  value — or  price — by  virtue  of  the  fact  that 
it  is  the  effect  of  utihty,  may  measure  utility,  the  doctrine 
ought  to  work  the  other  way  about. 

But  in  point  of  fact,  as  should  be  already  clear,  neither 
the  labor  measure  or  the  utility  measure,  on  the  one  hand, 
nor  the  value  measure  of  utility  or  of  labor,  on  the  other 
hand,  will  work,  in  any  other  sense  than  that  both  labor 
and  goods  get,  visibly,  constantly,  obtrusively,  a  price 
rendering  in  the  market.  Laborers  differ  in  all  possible 
shades  of  feeling  toward  labor;  labor  differs  in  all  possible 
grades  and  directions  of  effectiveness ;  the  only  homogeneity 
is  the  homogeneity  of  market  value  in  terms  of  price.  And 
as  widely  as  men  differ  in  their  attitude  toward  productive 
effort  they  differ  also  in  their  attitude  toward  the  products 

product  into  a  social  hieroglyphic.  Later  on  we  try  to  decipher  the 
hieroglyphic,  to  get  behind  the  secret  of  our  own  social  products ;  for 
to  stamp  an  object  of  utility  as  a  value  is  just  as  much  a  social  product 
as  language.  The  recent  scientific  discovery  that  the  products  of  labor, 
so  far  as  they  are  values,  are  but  expressions  of  the  human  labor  spent 
in  their  production,  ....  by  no  means  dissipates  the  mist  through 
which  the  social  character  of  the  labor  appears  to  us  to  be  an  objective 
character  of  the  products  themselves." — Carl  Marx,  Das  Capital 
(Moore  and  Aveling  trans.),  Humboldt  Publishing  Co.,  New  York, 
p.  28. 

"It  is  not  money  that  renders  commodities  commensurable 

It  is  because  all  commodities,  as  values,  are  realized  human  labor,  and 
therefore  commensurable,  that  their  values  can  be  measured  by  one  and 
the  same  special  commodity,  and  the  latter  be  converted  into  the  com- 
mon  measure   of  their  values." — Ibid.,   p.   41. 

"There  is,  of  course,  in  present  conditions,  no  possible  means  of 
arriving  at  a  definite,  concrete  labor  coin,  so  to  say,  which  shall 
establish  the  value  of  commodities  when  and  as  they  are  produced. 
The  individual  labor  time  it  may  take  to  produce  a  commodity  is,  as  we 
have  seen,  no  test  whatever  of  the  length  of  social  time  necessary  to 
produce  the  same  commodity. 

"Nevertheless  social  labor  time  does  measure  the  value  of  com- 
modities with  reference  relatively  to  one  another.     How  is  this  done? 

"Take    the    case    of   weight.      What    is    weight? To    say 

that  it  is  ponderosity  doesn't  help  us  a  bit.  Yet  we  know  well  enough 
what    weight    is    by    itself.      Moreover,    we    weigh    things    relatively    to 

their  weight  in  other  things But  what  the  unit  of  weight  is  in 

the  abstract  we  can  no  more  tell  than  before  we  weighed  the  wheat. 

"In  chemistry  likewise,  ....  what  was  the  Daltonic  atom? 
Nobody  knew  and  nobody  knows What  is  a  volume  in  chem- 
istry? It  is  just  as  impossible  to  say  as  what  is  an  atom.  None  the 
less,  though  we  do  not  know  what  they  are — any  more  than  we  can 
express  in  figures  \/—i — volumes  serve  the  purpose  of  a  common 
measure  of  the  most  diverse  chemical  compounds.  So  it  is  with  simple, 
abstract,  social  human  labor." — H.  M.  Hyndman,  The  Economics  of 
Socialism,  London,  1896,  pp.  51-53. 


THE  STANDARD  OF  DEFERRED  PAYMENTS        1 79 

of  labor ;  the  only  homogeneity  is  that  expressed  in  the  price 
offer.  The  only  utility  relation  possibly  to  be  expressed  by 
market  price  is  that,  for  some  marginal  man  or  men,  com- 
peting utilities,  of  unstable  and  unknown  magnitude,  are 
at  balance. 

But  what  has  all  this  to  say  for  the  standard  of  deferred 
payments?  If  utilities  cannot  be  reduced  to  homogeneity, 
on  any  basis  but  that  of  price — the  opaque  market  fact — it 
would  seem  to  follow  that  the  problem  of  deferred  pay- 
ments must  be  worked  out  in  terms  of  value  rather  than  in 
terms  of  utility.  And  especially  would  this  appear  to  be 
true,  in  view  of  the  fact  that  equal  market  values  are  inca- 
pable of  expressing  any  equality  of  utility  in  terms  of  abso- 
lute subjective  magnitude,  but  only  in  equivalence  of 
control  over  those  external  objective  goods  which  are  the 
bearers  of  utility. 

But  on  the  other  hand  what  shall  be  done  with  the  fact 
that,  carried  over  into  individual  interests,  values  have  no 
meaning  but  in  terms  of  utility  ?  And  after  all,  value  being 
a  ratio  of  exchange,  what  does  it  mean  to  say  that  one 
thing  at  one  time  has  the  same  value  as  another  thing  at 
another  time?  What,  indeed,  would  it  mean  to  say  that  a 
certain  thing  at  one  time  has  the  same  value  as  the  same 
thing  at  another  time  ?  Or  finally  what  does  it  mean  to  say 
that  two  things  at  any  given  time  have  the  same  value? 

Value  can  be  expressed  only  objectively,  in  terms 
of  something  which  is,  for  the  time  being,  taken  as  the 
medium  or  standard  of  expression.  Thus,  to  say  that  two 
things  have  today  the  same  value  might  mean  very  differ- 
ent things  accordingly  ( i )  as  different  men  in  different  bar- 
gains should  variously  choose  some  one  or  other  particular 
commodity  as  standard  for  the  occasion;  or  (2)  as  a 
certain  group  or  congeries  of  objective  goods  should  some- 
how— more  or  less  arbitrarily — come  to  be  chosen  as  a 
composite  standard ;  or  ( 3 )  as  equivalence  should  be  sought 
through  the  intermediary  of  some  conventionally  adopted 
depository   of    unspecialized   purchasing   power,    a    money 


i8o  VALUE  AND  DISTRIBUTION 

standard.  It  is  this  last  case  which  actually  is  meant  by 
equivalence  in  value  in  practical  affairs;  and  if,  instead  of 
this,  a  group  of  commodities  were  chosen,  the  group 
would  most  reasonably  be  selected  as  made  up  of  those  com- 
modities into  which,  for  the  broad  general  average  of 
consumers,  unspecialized  purchasing  power  gets  expended. 

The  possibility  first  mentioned  is  outside  the  pale  of 
consideration  and  the  second  case  is  a  subhead  under  the 
first,  though  somewhat  modified  to  include  provision  against 
the  probable  instability  attending  any  particular  commodity 
as  standard,  zvhere  intervals  of  time  intervene.  The 
necessity  of  providing  for  this  case  of  time  interval  is,  be 
it  remembered,  the  problem  of  the  deferred-payment  stand- 
ard. 

But  possible  instability  in  what?  And  here  we  are 
back  at  our  original  question:  In  value?  But  this  is 
meaningless,  unless  translated  into  command  over  useful 
things — goods.  And  what  goods?  There  is  no  answer 
but  to  choose  some  group  or  complex  of  goods  selected  in 
such  fashion  as  to  represent  a  sort  of  average  budget. 
That  a  of  today  equate  in  value  against  x  of  next  year  must 
require  that  a  hold  today  to  every  other  good  the  same 
exchange  relations  that  x  will  hold  next  year. 

And  so,  to  say  that  two  different  things  at  one  and  the 
same  time  have  the  same  value  is  merely  to  assert  their 
actual  equality  in  exchange  power  as  referred  to  some 
selected  commodity  or  complex  of  commodities — a  price 
statement  possible  only  by  the  temporary  or  conventional 
adoption  of  a  standard.  And  to  assert  that  a  certain  thing, 
at  one  time,  has  the  same  value  as  the  same  thing  at  another 
time,  must  mean  an  unchanged  control  over  the  same  con- 
geries or  budget  of  goods, — practically  the  same  control  over 
some  standard  of  payment,  some  medium  assumed  as  main- 
taining— or  selected  as  nearest  approximating — an  un- 
changed relation  toward  such  a  budget-complex.  The 
same  solution  would  have  to  be  given  to  the  problem  of 
how  to  compare  in  value  one  thing  at  one  time  with  another 


THE  STANDARD  OF  DEFERRED  PAYMENTS        i8i 

thing-  at  a  later  time.  Equality  in  price  over  intervals  of 
time  is  then  intelligible  and  possible ;  but  equality  in  value — 
as  distinguished  from  price — between  two  commodities 
would  require  that  one  at  one  time  hold  precisely  the  same 
exchange  relation  to  every  other  good  as  that  of  the  other 
at  the  other  time.* 

*  It  is  worthy  of  note  that  in  exchange  relations  between  goods 
of  the  same  time,  as  distinguished  from  cases  of  deferred  settlement, 
it  has  been  urged  (for  example,  by  most  of  the  socialists,  the  Marxians 
especially)  that  the  price  of  any  commodity  expresses  that  the  value 
of  it  is  as  much  as  is  the  value  of  a  certain  quantity  of  the  standard ; 
the  value  of  the  standard  and  not  the  standard  itself  is  thus  held  to  be 
the  essential  fact  in  money,  or  at  all  events,  the  essential  fact  of  its 
money  function.  And  surely  the  standard  itself  cannot,  in  any  other 
sense  than  that  of  its  value  quantity,  be  held  adapted  to  serve  as  a 
measure  of  value.  How  much  money  shall  be  paid  for  a  commodity 
depends,  of  course,  in  part  upon  the  value  of  the  commodity,  but  in 
part  also  upon  the  value  of  the  money. 

The  better  doctrine  appears,  however,  to  be  that  of  Laughlin 
(Principles   of  Money,   pp.    14-16)  :      "A    standard   ....   is   not,    and 

cannot  be,  synonymous  with  a  measure  of  value This  is  not 

what  we  get  by  the  use  of  a  standard The  exchange  value  of 

gold  varies  with  the  number  and  kind  of  things  priced  in  it.  By  pri- 
cing an  article  in  gold,  the  value  of  that  article  in  relation  to  other 
commodities  is  not  thereby  'measured'  by  gold.  In  such  a  case,  gold 
serves  only  as  common  denominator,  and  not  as  'a  measure  of  value,' 
because  it  does  not  thereby  state  the  relationship  of  exchange  which 
that  article  bears  to  all  other  exchangeable  goods.  All  that  is  obtained 
is  the  exchange  ratio  between  gold  and  that  particular  commod- 
ity  Moreover,  there  could,  of  course,  be  no  absolute  standard 

for  'measuring'  value,  since  any  one  article,  chosen  as  standard,  would 
itself  vary  in  value  ;  consequently  the  values  of  other  goods  would  be 
compared  with  a  standard  itself  constantly  varying.  Not  infrequently 
one  hears  of  an  argument  in  favor  of  gold  as  a  standard  that  it  is  as 
'invariable  as  a  yardstick.'  This  statement  contains  the  fallacy  of  sup- 
posing that  exchange  value  is  as  absolute  as  linear  length,  when  it  is 
only  a  relation  of  one  article  to  another  expressed  quantitatively."  (But 
see,    contra.    Carver,    Quarterly    Journal    of    Economics,    May,     1907.) 

But  however  all  this  may  be,  it  is  evident  that  in  deferred-payment 
relations,  merely  a  given  amount  of  money  is  stipulated  ;  the  amount 
of  value  actually  to  be  received  cannot  be  stipulated,  but  must  neces- 
sarily depend  upon  the  amount  of  value  which,  at  the  time  of  payment, 
may  happen  to  be  contained  in  the  amount  of  money  paid.  The 
measure  function  of  money  is  clearly  not  here :  a  future  unknown 
value  cannot  be  a  value  expression  of  the  value  of  other  things. 

But  whether,  if  at  all,  in  current  exchanges,  and  if  so  in  what 
sense,  money  may  be  regarded  as  a  measure  of  value  is  a  problem  of 
far    greater    perplexity. 

It  has  mostly  gone  by  common  acceptance  that  in  order  that  goods 
exchange  against  each  other  they  must  be  possessed  of  some  common 
quality  by  virtue  of  which  they  may  be  related  to  each  other  for  the 


i82  VALUE  AND  DISTRIBUTION 

But  after  all,  why  bother,  even  for  theoretical  purposes, 
with  this  budget  matter?  If  the  standard  requires  either 
justification  or  rectification  by  the  test  of  the  budget,  what 
shall  then  serve  to  justify  the  budget?  There  can  be  nothing 
for  this  but  the  attempt  to  obtain  an  average  and 
approximate  equality  of  service  through  the  construction 
of  a  budget  made  up  of  a  widely  selected  and  carefully 
proportioned  variety  of  consumption  goods.  Indemnity  to 
the  borrower  for  utilities  parted  with  must  be  found  in  an 

purposes  of  the  exchange  process :  thus  Marx,  finding,  as  he  thought,  that 
utility  could  not  be  this  common  quality,  forthwith  inferred  that 
labor  cost  must  be  the  quality  sought. 

Recalling  that  only  the  two  facts,  utility  and  scarcity,  must  concur 
for  the  emergence  of  value,  and  that  scarcity  is  essential  only  because 
solely  on  terms  of  it  can  all  items  of  a  stock  possess  utility,  and  recall- 
ing also  that  some  articles  have  scarcity  and  value  irrespective  of  labor 
cost  and  independent  of  it,  it  has  seemed  to  follow  that  utility  is  that 
common  quality  by  virtue  of  which  different  goods  come  to  be  com- 
parable in  their  appeal  to  human  choice. 

But  that  goods  appeal  to  the  individual  only  through  their  utility 
to  him  does  not  imply  the  existence  of  some  one  aspect  or  quality  of 
utility  common  to  all  articles  of  value ;  there  are,  indeed,  no  value 
facts  affording  equal  utility  to  all  individuals,  none  that  are  constant  at 
all  times  in  their  service  to  any  one  individual,  and  none  even  that  at  all. 
times  are  serviceable  to  the  same  individual  in  even  the  slightest 
degree. 

But  it  none  the  less  remains  true  that  for  the  emergence  of  value 
the  supply  of  any  good  must  i-anifest  some  degree  of  scarcity  relative 
to  the  desire  for  it ;  otherwise  there  can  be  nowhere  an  individual 
with  reference  to  whom  the  stock  can  establish  a  marginal  significance 
by  virtue  of  which  it  may  impose  upon  that  individual  a  sacrifice  in 
purchase   cost   or  in  productive   outlay. 

Thus  the  possession  of  marginal  utility — but  all  the  while  as 
dependent  upon  this  relative  scarcity — is  sufficient  for  the  existence  of 
market  value.  But  this  utility  is  in  no  sense  a  social  or  a  common  or 
an  objective  utility,  but  is  in  every  case  purely  a  relation  between  the 
good  in  question  and  the  desires  of  an  individual.  The  only  fact  both 
constant  and  objective  in  the  market-value  phenomenon  is  that  of  com- 
manding a  price,  money  or  other — that  is,  of  possessing  exchange 
power. 

But  does  this  fact  of  exchange  power,  expressed  as  command  over 
some  quid  pro  quo,  imply  in  any  sense,  in  either  of  the  articles 
exchanged,  the  possession  of  the  measure  function? 

In  a  certain  sense,  doubtless,  any  comparison  by  an  individual  of  the 
utility  to  him  of  different  items  of  goods  implies  a  process  of  mental 
measurement ;  and  it  must  be  admitted  that  a  comparison  of  utility  with 
utility  is  the  very  process  and  the  only  process  through  which  the  indi- 
vidual trader  arrives  at  the  disposition  to  trade.  But  in  this  trader's 
barter  activity  there  is  rarely  for  him  an  equality  of  utility  between 
the  thing  received  and  the  thing  parted  with,  never,  indeed,  an  equality 


THE  STANDARD  OF  DEFERRED  PAYMENTS        183 

equally  important  aggregate  of  utilities  returned.  Here, 
as  everywhere  in  the  individual  reckoning,  money  is  an 
intermediate  between  utility  quantities  and  not  between 
value  quantities. 

It  is  possible  that  a  change  in  point  of  view  may  aid  in 
the  solution  of  this  not  oversimple  and  very  important 
problem. 

Suppose  the  only  products  in  society  to  be  hats  and 

excepting  in  his  marginal  trade  or  in  the  case  of  the  marginal  trader ; 
and  there  is  never  in  any  case,  marginal  or  other,  any  necessity  or 
occasion  for  the  measure  function  or  calculation,  otherwise  than  to 
the  degree  and  in  the  sense  that  measure  is  implied  in  the  mere  fact 
of  comparison  and  choice, — a  sort  of  mutual  measuring  of  either  com- 
modity by  the  other. 

Nor  is  the  difficulty  with  the  existence  of  a  market-value  measure 
that  utility  may  not  be  the  measure  of  utility,  if  only  the  utility  to 
different  persons  were  the  same  utility,  a  common  and  objective  reality. 
It  is,  in  truth,  the  very  essential  of  a  measure  that  it  possess  in  itself 
the  quality  it  is  to  measure  in  other  things.  Only  something  of  length 
can  measure  length  ;  only  something  of  weight  can  measure  weight.  And 
the  choice  of  a  measure  is  necessarily  arbitrary  ;  to  express  any  dimen- 
sion of  any  given  body  is  possible  only  in  terms  of  relativity  and  only 
by  reporting  it  as  such  a  part  or  such  a  multiple  of  the  dimension  of 
some  other  body.  So  many  pounds  of  weight  is  merely  so  many  times 
the  weight  of  another  chosen  body,  taken  at  a  certain  purity,  under  pre- 
scribed conditions  of  temperature  and  of  altitude. 

Nor,  seemingly,  is  Professor  Laughlin  correct  in  insisting  that  the 
psychological  necessities  of  the  measure  function  prescribe  that  the 
measure  fact  be  a  fixed  and  definite  and  unchangeable  fact,  but  is  only 
correct  in  the  implied  insistence  that,  so  far  as  the  measure  falls  short 
of  this  test,  it  so  far  loses  its  serviceability  for  the  purposes  in  hand, 
and  must  rank  as  a  defective  measure  ;  the  quantity  of  utility  or  of 
value  fails  of  receiving  accurate  statement  and  definition  in  the  pur- 
ported measure.  So,  whatever  the  objective  fact  may  be  with  regard  to 
the  precise  invariability  of  the  accepted  measure,  it  is  fairly  clear  that, 
thought  of  as  a  seriously  variable  measure,  the  measure  thereby  ceases 
to  be  a  practicable  measure.  No  one  thing  of  utility  or  of  value  can, 
then,  ever,  market-wise,  by  its  quantum,  serviceably  and  adequately 
express  the  utility  or  value  quantum  of  another  thing ;  the  first  thing, 
the  purported-measure  thing,  has  no  stable  quantum  of  its  own,  but  is, 
by  its  very  nature,  constantly  varying;  thus  it  is,  by  this  very  fact, 
not  a  practicable  measure. 

But  there  is  a  difficulty  in  the  case  which  is  decisive  against  the 
presence  of  any  measure  function,  good  or  bad :  All  measurement 
whether  vague  or  precise,  is  a  quantitative  comparison ;  the  standard 
must,  then,  contain  a  quantum  of  some  certain  quality  or  magnitude, 
which  certain  quality  or  magnitude  must  in  some  degree  be  present  in 
the  thing  to  be  measured.  To  the  individual,  therefore,  it  is  not  impos- 
sible that  either  item  in  a  transaction  of  barter  express  in  terms  of  its 


1 84  VALUE  AND  DISTRIBUTION 

shoes,  and  that  it  somehow  comes  about  that  for  each  item 
of  either  kind  of  goods  today  there  are  tomorrow  two 
items  of  goods :  what  does  it  mean  to  say  that  vahies  have 
increased  and  that  thus  there  is  room  for  the  emergence  of 
interest  ?  Goods  have  increased,  utiHty  has  increased,  goods 
having  value  have  increased;  one  hat  will  not  buy  more 
shoes  than  one  hat  would  buy  yesterday,  but  two  hats  will 
buy  more  than  the  one  hat  of  yesterday  would  buy.  There- 
utility,  more  or  less  accurately,  the  utility  of  the  other  item.  But  not 
so  with  market  value  ;  here  nothing  is  asserted  or  implied  as  to  any 
general  or  objective  utility,  nor  can  the  mere  brute  fact  of  exchange 
parity  import  a  parity  of  utility  for  traders  in  general  or  any  sort  of 
market-utility  calculus  or  parity.  Utility  to  whom  ?  Market  utility 
parities  or  calculations  are,   indeed,  ex  vi   termini,   sheer  absurdities. 

The  case  is  bad  enough  with  any  attempt  to  set  up  a  market-price 
or  market-value  measure  of  utility  ;  it  is  still  worse  with  any  attempt  at 
the  market-value  measure  of  market  value.  The  difficulty  here  is  that 
value,  in  this  market  sense,  fails  in  the  requirement  fundamental  to  the 
notion  of  measurement,  namely,  that  a  measure  must  be  quantitative 
and  must  measure  things  of  quantity.  But  market  value  is  neither  a 
magnitude  nor  a  quantity,  but  only  a  ratio.  True,  a  ratio  can  be 
restated  as  a  fraction — yi  or  J^  or  %  of  unity — ^but  it  becomes  quanti- 
tative only  in  becoming  concrete,  as  J^  or  ^  or  ^  of  something. 
Thus,  that  the  exchange  ratio  between  hats  and  shoes  is,  say,  2  to  i, 
offers  no  possibility  of  giving  quantitative  expression  to  the  exchange 
ratios  of  horses  and  wheat  to  each  other  or  to  anything  else.  Nor  does 
the  selection  of  a  conventional  price  commodity  avoid  the  difficulty  in 
any  other  sense  than  that  it  makes  possible  of  comparison  the  ratio  of 
horses  to  gold  with  the  ratio  of  hats  to  gold — all  to  the  conclusion  that 
while  horses  stand  to  dollars  as  100  to  i,  hats  stand  to  dollars  as  i  to  i. 
This  expresses  merely  the  two  different  exchange  ratios  held  by  the 
respective  commodities  to  gold — asserts,  that  is,  two  different  powers 
of  command  over  gold,  and  then  declares  that  one  power  is  one 
hundred  times  as  great  as  the  other.  But  merely  as  different  ratios  to 
gold  no  measure  is  disclosed:  (i)  the  value  of  gold  is  itself  possible 
of  expression  not  as  a  ratio  of  exchange  to  commodities  in  general,  for 
there  is  no  such  exchange  possible  and  no  ratio  for  its  expression,  but 
only  as  one  or  another  out  of  countless  different  possible  ratios. 
(2)  This  same  ratio  of  100  to  i  between  horses  and  hats  is  equally 
valid  to  express  the  ratios  of  countless  other  pairs  of  commodities 
relative  to  gold,  e.  g.,  pianos  to  kitchen  tables,  houses  to  sewing- 
machines,  shoes  to  laces.  The  ratios  of  things  to  one  another  in  Brob- 
dignag  were  the  same  ratios  as  in  Lilliput.  The  real  difficulty  is  again 
that  all  these  various  ratios  to  gold  are  mere  ratios  of  exchange,  and 
are  comparable  simply  and  only  with  this  significance  and  as  entirely 
lacking  in  any  ultimate  basis  or  content.  In  this  respect  the  case 
differs  from  true  measure  ratios  of  weight  or  length.  With  weight  the 
reference  is  to  the  quantitative  objective  reality  of  pressure  or  stress — 
with  length,  to  the  objective  quantitative  fact  of  extension.  With  the 
value  ratio,  however,  there  is  nothing  but  the  ratio. 


THE  STANDARD  OF  DEFERRED  PAYMENTS        185 

fore,  measured  in  shoes,  the  hats,  having  increased  in  num- 
ber, have  more  value.  But  this  is  to  accept  shoes  as  a 
standard.  Shoes  Hkewise,  since  they  have  increased  in 
volume,  can  be  shown  to  have  proportionately  increased  in 
value,  if  only  hats  be  accepted  as  the  standard:  as  why 
should  they  not  ?  But,  on  the  other  hand,  why  should  they  ? 
Are  either  hats  or  shoes  invariable  in  any  quality  important 
to  value,  and,  if  so,  in  what  quality?  There  is  no  quality 
other  than  utility  that  can  have  claim  to  consideration.  But 
with  these  expansions  of  supply,  the  utility  quantity  has 
fallen,  per  item  of  supply.  Value  can  in  this  case  mean 
nothing  but  the  ratio  of  exchange  between  hats  and  shoes, 
and  this  ratio  has  not  changed.  How  talk  about  an  increase 
in  the  total  of  exchange  ratios?  By  just  so  much  as  some 
things  gain  in  value  others  must  lose ;  and  those  that  gain, 
gain  only  as  stated  in  terms  of  others.  It  follows  there- 
fore that  to  return  an  equal  sum  of  values  means  nothing, 
unless  it  be  merely  a  poor  way  of  expressing  the  return 
of  an  unchanged  quantity  of  utility. 

But  equality  of  utility  is  not  a  relation  capable  of 
expression  in  temis  of  value,  either  for  contemporaneous 
exchange  or  for  exchange  over  intervals  of  time  or  space. 
And  inasmuch  as  utility  is  purely  a  fact  of  the  individual 
psychology,  it  is  not  susceptible  of  quantitative  objective 
expression  of  any  sort.  Thus  the  return  of  an  equal  sum  of 
utilities  can  be  achieved  only  so  far  as  this  is  possible — and 
in  the  sense  that  it  is  possible — through  the  adoption  of 
some  conventional  standard  or  medium.  True,  price  is  a 
special  case  of  value ;  and  thus  to  resort  to  price  in  arriving 
at  equality  of  utility  is,  in  this  sense  and  so  far  forth,  a 
value  process.  But  that  gold,  like  any  other  commodity, 
obtains  its  exchange  standing  through  market-value  adjust- 
ments, and  must,  as  exchange  power,  itself  express  a  value 
relation,  proves  simply  that  resort  is  being  had  to  one  sort 
of  value  fact — and  this  a  special  and  peculiar  case — as 
mere  intermediate  to  the  most  expedient  solution  of 
a     pure     utility     problem.       But     no    value    equality     is 


1 86  VALUE  AND  DISTRIBUTION 

possible  in  the  case,  and  even  were  one  possible,  it  would 
be  irrelevant. 

Appeal  to  the  fundamental  principle  that  all  saving  is 
merely  postponed  consumption  enforces  the  conclusion  that 
the  payment  of  a  loan  should  be  made  upon  the  principle  of 
indemnity,  that  is,  should  be  the  return  of  rights  of  con- 
sumption of  equal  importance  with  those  parted  with,  which 
is  merely  another  way  of  saying  that  the  standard  of 
deferred  payments  is  ultimately  a  problem  in  utility  rather 
than  in  value. 

Or  the  argument  may  be  put  in  another  way : 
All  cases  of  mortgages,  notes  and  bonds,  bank  deposits,  and 
credits  in  general  are  protracted  instances  of  exchange.  The  whole- 
saler sells  his  groceries  at  three  months  time.  Instead  of  receiving 
his  pay  immediately  in  commodities,  or  in  money  with  which  to 
buy  commodities,  the  payment  side  of  the  trade  is  postponed  for  a 

term   of   months When   you   lend    money   you    really    sell 

the  right  to  things ;  when  you  are  repaid,  you  get  things  in  return. 
Thus  a  loan  is,  in  essence,  a  long-time  barter.  When  you  have 
sold  your  hats,  and  allow  X  to  take  the  money  for  which  they  sell, 
it  is  the  same  as  if  you  had  sold  X  the  hats,  or  the  goods  which  he 
buys  with  the  money.  When  he  pays  you,  he  really  returns  to  you 
remuneration  for  the  hats.  If  the  payment  is  a  fair  one,  the 
money  which  he  pays  you  must  not  have  gained  or  lost  in  its 
control  over  the  means  of  satisfying  human  wants.^ 

Clearly,  also,  this  utility  indemnity  can  rarely,  if  ever, 
be  attained  through  a  return  of  goods  specifically  like  in 
kind  and  volume  to  the  earlier  sum.  It  again  becomes  evi- 
dent, then,  that  to  the  extent  that  the  equality  is  attainable 
at  all,  the  payment  will  have  to  be  required  in  terms  of 
general  purchasing  power,  and  this  according  to  some 
standard,  conventional  or  occasional.  And  while  the  pay- 
ment for  earlier  money  by  later  money  is  the  return  of  a 
thing  of  value  in  payment  for  another  thing  of  value,  and,  in 
this  sense  therefore,  is  a  transaction  in  values,  and  while  it 
must  be  admitted  that  any  equality  in  utility  can,  in  any 
particular  case,  be  only  approximate,  it  is  still  true  that  no 

"Davenport,  op.  cit.,  sec.   170. 


THE  STANDARD  OF  DEFERRED  PAYMENTS        187 

assertion  of  an  equality  in  values  is  in  any  way  possible, 
since  the  different  money  sums  are  rarely,  if  ever,  exchanged 
ag-ainst  the  same  sorts  of  goods;  and  even  were  they  so 
exchanged,  the  same  bulk,  number,  weight,  or  other  meas- 
ure of  concrete  commodities  is,  with  varying  times,  a  very 
different  and  changing  fact  in  its  aspect  of  service, — not, 
be  it  noted,  to  human  needs  in  general — which  would  be  a 
strong  enough  case,  but  rather  to  the  particular  needs  of  the 
specific  human  being  under  consideration." 

Thus — forestalling  a  little  the  interest  problem — there 
is,  restated  as  a  problem  worked  out  in  terms  of  money, 
no  great  difficulty  in  explaining  why,  with  the  more  goods 
existing  by  the  aid  of  capital,  a  higher  price  should  be 
obtainable  therefor,  and  thereby  a  money  premium  be 
chargeable  and  payable.     But  at  what  rate?    And  it  should 

"  A  possible  difficulty  here  requires  to  be  provided  for — the  modi- 
fications which  changes  in  standards  of  living  impose  upon  the  principle 
of  utility  indemnity,  in  the  mere  sense  of  objectively  equivalent  goods. 
"With  increasing  effectiveness  of  labor,  human  needs  have  expanded. 
That  which  was  once  relative  comfort  has  become  privation — privation 
absolutely  in  view  of  higher  standards  of  desire — privation  relatively 
in  view  of  higher  levels  of  comfort  or  luxury  in  society.  The  causes 
which  have  served  to  make  greater  consumption  possible  have  them- 
selves made  greater  consumption  necessary.  Payment  in  an  equal 
amount  of  control  over  the  objects  of  human  desire  is  not  an  adequate 
return   for  the   earlier   sacrifice.     If  even   exchange   of  work   would  be 

overpayment,  even  exchange  of  utility  would  be  underpayment 

That  the  creditor  receive  a  volume  of  commodities — services  included 
— merely  equal  to  the  volume  lent,  would  be  enough,  were  the  creditor 
substantially  the  same  creditor  in  needs  and  requirements — if,  for 
example,  the  advance  in  labor  effectiveness  had  taken  place  in  a  night, 
immediately  after  the  loan  was  made  and  its  proceeds  consumed.  By 
this  very  measure  of  usefulness,  payment  must  be  made  in  something 
more  than  an  equivalent  command  over  commodities.  The  increased 
effectiveness  of  labor  has  brought  about  a  higher  level  of  consumption 

— a  raised  standard  of  comfort  and  of  life The  line,  then,  of 

compensation — of  equality  in  sacrifice — must  be  found  somewhere  above 
equality  in  purchasing  power,  somewhere  below  equality  in  command 
over  human  effort.  Something  must  be  added  to  payment  on  account 
of  the  greater  necessities  of  the  lender  ;  something  also  on  account  of 
greater  requirements  for  the  maintenance  of  social  position  and  rela- 
tive well-being.  The  point  of  fair  adjustment  is  to  be  found  where  the 
direct  gain  from  larger  satisfactions  is  offset  by  the  disadvantage  of 
increased  requirements  and  decreased  command  over  social  distinction." 
— Davenport,  op.  cit.,  sec.  165. 


1 88  VALUE  AND  DISTRIBUTION 

now  be  clear  that  interest  also  is  not  a  problem  of  value  or 
of  value  surplus  but  rather  of  price  and  of  price  surplus.'^ 

~  It  is  perhaps  worth  while,  as  illustrative  of  the  general  trend  of 
discussion  with  regard  to  the  standard  of  deferred  payments,  to  note 
that  Mr.  C.  M.  Walsh,  in  his  brilliant  discussion  in  The  Fundamental 
Problem  of  Monetary  Science,  proceeds  altogether  upon  the  assump- 
tion that  the  problem  cannot  be  other  than  one  of  value ;  takes  this 
as  so  far  axiomatic  as  to  require  no  proof,  and  devotes  himself 
entirely  to  the  attempt  to  decide  which  form  or  concept  of  value — cost 
value,  esteem  value,  or  exchange  value — is  best  adapted  to  the  needs  of 
the  problem. 

As  early  as  upon  page  i  he  sets  forth  that  "that  is  the  best  money 
which  approaches  nearest  to  being  stable  in  value."  Any  variety  of 
utility  standard  is  foreclosed  from  consideration  by  the  easy  dictum 
that  "the  idea  of  use  value  is  of  covirse  to  be  left  out  of  the  discus- 
sion"— page  II — and  it  thereupon  gets  left  out.  Then,  having  ably  and 
convincingly  driven  the  labor-cost  standard  from  the  field,  and  having 
also,  to  his  own  satisfaction,  disposed  of  esteem  value — probably 
meaning  thereby  subjective  value  in  the  Austrian  sense — he  finds  that 
exchange  value,  being  the  only  thing  left,  affords  the  only  possible 
standard  of  deferred  payments.  Just  how,  finally,  the  desired  equality 
in  exchange  power  between  loan  and  payment  could  be  ascertained  or 
proved  is  not,   at  least  to  the  present  writer,  made  fully  manifest. 


CHAPTER  XIV 
INTEREST 

While,  as  has  already  been  argued,  and  as  will  later  be 
further  argued,  interest  has  its  basis  in  the  advantages 
attaching  to  present  goods  over  future  goods,  it  is  never- 
theless to  be  defined,  in  a  competitive  economy,  as  the 
premium  which  present  purchasing  power,  as  money  or  in 
terms  of  money,  commands  over  future  purchasi)ig  power 
in  terms  of  money. 

But  why  does  this  premium  exist?  Is  it  at  all  due  to  the 
technological  productivity  which  present  wealth,  in  form  of 
instrumental  goods,  manifests  with  passing  time?  Or  does 
interest  merely  express  the  fact  that  some  men  find  it  to 
their  advantage,  or  at  least  to  their  choice,  to  promise, 
against  lOO  dollars  of  command  over  present  consumption 
rights,  the  payment  at  the  end  of  a  given  term  of  105 
dollars  of  this  purchasing  power?  And  what  bearing 
upon  the  rate  of  premium  has  the  common  preference  for 
using  purchasing  power  for  purposes  of  immediate  con- 
sumption— the  common  indisposition  to  postpone  consump- 
tion— to  save?  And  how  about  those  people  who,  in  their 
rational  or  irrational  solicitude  for  the  future,  would  save 
even  without  any  money  agio — persons  to  whom  some 
forecasted  change  of  need  is  a  sufficient  present  induce- 
ment and  premium  upon  saving,  if  indeed,  any  premium  of 
any  sort  is  needed  in  their  case? 

And  what  is  the  precise  relation  of  technological 
productivity  to  the  problem?  After  all,  is  not  the 
entire  interest  relation  one  between  present  consump- 
tion goods,  or  rights  to  consumption  goods,  as  over 
against  future  consumption  goods,  or  rights  to  con- 
sumption goods?  The  rate  of  agio,  or  of  discount,  having 
been   established   in   the   consumption-goods   market,   have 


190  VALUE  AND  DISTRIBUTION 

these  technological  considerations  more  to  do  with  the  case 
than  this,  that  such  technological  methods  and  processes  as 
promise  a  productive  agio  sufficient  to  overbalance  the 
market  discount  to  which  the  future  product  is  to  be  sub- 
jected in  getting  a  present  worth,  are  found  practicable  of 
undertaking?  Or  put  it  as  follows:  the  abstinence  protest 
being  such  in  society  that  105  units  of  purchasing  power, 
expressed  in  the  conventional  standard,  due  a  year  hence, 
exchange  today  against  only  100  such  units  for  today's  use 
— has  technological  productivity  any  other  relation  to  the 
case  than  this,  that  such  technological  uses  as  can  promise 
105  a  year  from  today  on  account  of  the  100  now,  are  fea- 
sible of  undertaking?  And  what  of  the  100  that  can  regu- 
larly and  recurrently  transform  itself  yearly  into  no?  Must 
it  not,  by  this  very  fact,  be  said  to  be  not  100  but  200,  if,  of 
course,  this  10  agio  is  to  be  imputed  to  it  rather  than  to  the 
management  of  it?  That  is  to  say,  are  not  all  rentals  and 
all  rent-bearers  capitalized  into  a  present  worth  upon  the 
basis  of  a  discount  rate  which  is  obtained  without  reference 
to  them? 

Land  recurrently  pays  a  rent ;  machinery  also  commands 
a  hire :  are  these  hires  mere  rents  or  are  they  time-discount 
facts?  If  100  of  land  rent  is  due  a  year  from  now,  this  rent 
has  a  present  worth  of  95-I-.  And  likewise  if  machinery 
belonging  to  me,  or  a  mortgage  now  running  in  my  favor, 
will  bring  100  a  year  hence,  this  100  suffers  a  discount  to 
95 -j-  in  the  process  of  getting  over  into  a  present  worth.  If 
this  100  were  itself  interest  upon  an  invested  principal  sum 
of  2,000,  shall  not  the  5  of  interest  be  taken  to  show  that  this 
time-discount  rate  is  itself  based  upon  some  underlying 
time-discount  rate?  That  is  to  say,  if  all  rents  and  hires 
themselves  are  subject  to  the  principle  of  time  discount, 
what  becomes  of  these  rents  and  hires  as  themselves  the 
explanation  of  the  phenomenon  of  time  discount?  Can  this 
discount  fact  be  taken  as  a  mere  result  of  the  fact  that  all 
machines  and  farms  worth  2,000  each  are  earning  100  each  ? 
Or  is  it  not  rather  true  that  if  they  each  earn  100  annually, 


mTEREST  191 

we  therefore  call  them  each  worth  2,000?  And  why  is  this 
the  case?  Whence  is  derived  this  rate  of  5  by  which  to  do 
this  capitalizing?  For  if  the  5  per  cent,  rate  is  derived 
from  the  fact  that  the  2,000  earned  100,  it  will  not  do  to 
invoke,  in  the  same  breath,  this  rate  in  order  to  explain  that 
the  rented  fact  has  2,000  of  value. 

Proof  that  all  instruments  earn  rentals  for  time  use  will 
perhaps  suffice  to  prove  value  productivity ;  but  will  it  also 
suffice  or  contribute  to  explain  interest?  Or  is  time  dis- 
count rather  a  phenomenon  belonging-  exclusively  to  con- 
sumption goods  or  to  purchasing  power  in  the  time  aspect — 
which  time  discount  is  then  applied  to  place  a  present  worth 
upon  each  recurring  rent  payment  separately,  and  to  make 
possible  a  capital  value  as  the  sum  of  the  present  worths  of 
a  series  of  rents? 

It  is  not  uncommonly  said  that  each  productive  agent, 
labor,  for  example,  is  paid  according  to  its  value  produc- 
tivity. But  if  the  laborer  is  paid  before  his  product  is 
marketable,  the  wage  received  must  be  lower  by  the  measure 
of  the  time  discount.  And  it  is  likewise  said  of  capital  that 
its  remuneration  is  the  equivalent  of  the  value  productivity 
of  the  capital.  But  why  is  the  total  value  of  the  capital 
scaled  down  to  correspond  to  the  present  worth  of  its 
future  returns? 

Or  to  put  the  problem  in  still  another  way — for  every 
possible  device  must  be  invoked  to  the  end  of  getting  this 
most  elusive  of  problems  adequately  stated :  All  that  the 
distributive  outcome  of  production  can  ever  show  is  that, 
out  of  the  aggregate  production,  105  is  to  be  imputed  to 
capital  where  only  100  of  capital  originally  went  in;  why 
was  the  capital  that  was  going  in,  and  that  was  to  emerge 
as  this  105  of  result,  worth  only  100  in  the  beginning? 
Why  not  originally  worth  105? 

But  100  what?  And  105  what?  Are  these  anything 
but  dollars,  or  purchasing  power  in  terms  of  dollars  as  the 
standard?  Is  interest  anything  more  than  a  standard  dif- 
ferential   due    to    the    rents    which    instrumental    goods. 


192  VALUE  AND  DISTRIBUTION 

appraised  in  money,  afford  in  money,  and  to  premiums 
which  present  purchasing  power  or  present  money  com- 
mands, for  consumption  purposes,  over  future  purchasing 
power  expressed  in  terms  of  the  standard? 

And  is  there,  after  all,  any  problem  of  surplus  value 
with  relation  to  interest,  any  more  than,  with  the  question 
of  the  standard  of  deferred  payments,  there  was  found  to 
be  a  problem  of  equality  in  value?  Is  it  possible  to  say, 
because  there  is  a  physical  net  return  upon  instrumental 
goods,  that  there  therefore  is  or  is  not  an  increase  of  value 
or  a  net  return  of  value?  The  increased  weight-and-tale 
total  of  goods  may  sell  for  less  as  well  as  for  more  money ; 
but  even  in  the  case  of  an  admitted  increase  capable  of 
being  established  as  a  physical  net  return  attributable  to  a 
particular  and  isolated  instrument  good — a  case,  we  will 
assume,  of  a  cow  worth  at  the  beginning  of  the  year  $ioo 
and  represented  at  the  end  of  the  year  by  the  same  cow  in 
equally  good  condition,  and,  together  with  her,  a  net  gain  of 
$5  worth  of  calf;  even  in  this  simplest  of  cases  is  it  possible 
to  say  that  there  has  been  any  increase  of  value?  The  105 
dollars  will  not,  ordinarily,  indeed,  cannot,  be  used  to 
purchase  the  same  things;  some  of  the  goods  which  would 
have  been  bought  and  consumed  by  some  one  or  other,  had 
the  cow  been  sold  or  killed,  its  price  spent,  and  its  quid  pro 
quo  consumed,  have  risen  in  price  and  some  have  fallen, 
some  are  no  longer  in  the  market,  the  while  that  others, 
before  entirely  unknown,  have  appeared  in  the  market ;  and 
in  any  case,  the  utilities  attached  to  the  same  objective 
goods  cannot  be  the  same  utilities;  men  change,  seasons 
change,  temperature  changes,  food  requirements  change, 
fashions  change.  Is  the  more  of  the  105  an  increase  in 
point  of  value,  or  rather  is  it  merely  and  purely  a  question 
of  change  in  the  aggregate  of  service,  a  comparison  of 
the  total  of  utility  commanded  by  the  105  of  standard  as 
against  the  earHer  100  of  standard?  Is  interest  truly  a 
value  problem  in  any  other  sense  than  that,  by  the  process 
of  discount,   different   and  otherwise   incomparable   utility 


INTEREST  193 

volumes  are  brought  into  relation  for  one  and  the  same 
time  ?  ^ 

But  even  if  all  this  is  satisfactorily  answered,  there  will 
remain  the  difficulty  of  tracing  out  the  process  of  determina- 
tion of  this  rate  of  discount,  and  of  deciding  precisely  what 
parts,  relatively  to  each  other,  technological  productivity 
and  psychological  time  preference  have  in  the  determina- 
tion. 

Again,  have  we  here  a  problem  of  present  goods  against 
future  goods,  or  rather  only  a  problem  in  the  field  of 
abstract  capital,  of  the  loan  fund,  an  investigation  of  the 
relation  of  a  quantum  of  the  standard,  or  of  purchasing 
power  in  terms  of  the  standard,  at  one  time,  as  against  a 
quantum  of  standard  at  another  time — the  problem  of  how 
much  of  standard  a  year  hence  equates  against  100  of 
standard  of  today?  and  then,  why? 

If  the  solution  is,  indeed,  along  this  last  line,  it  is 
perhaps  easy  to  see  why,  with  a  premium  offered  by  differ- 
ent borrowers   for  the  present  standard   for  consumption 

^  But  we  may  well  stop  to  ask  what  all  this,  when  resolved,  will 
have  to  do  with  the  present  status  and  the  development  of  the  argu- 
ment. 

As  a  cost-of-production  computation,  in  the  competitive  reckoning, 
all  hires  of  productive  instruments  and  all  interest  charges  of  any  sort 
must  be  included  in  the  computation.  That  is  to  say,  cost  includes 
wages,  rent  of  land,  all  rents  of  all  other  instruments,  and  also  the 
interest-discount  charge  due  upon  the  time  employment  of  entre- 
preneur capital. 

The  value  problem,  upon  the  cost-of-production  level  of  analysis, 
cannot  do  otherwise  than  to  accept  the  discount  rate  as  a  datum,  an 
underlying  and  definitive  fact  requiring  no  examination,  precisely  as 
the  cost-of-production  analysis  accepts  without  question  and  takes  for 
granted  all  value  hires  and  value  rentals  upon  instrumental  or  agent 
facts.  On  this  level  we  have  no  concern  with  the  theory  of  interest ; 
it  is  only  when  we  come  to  the  examination  of  the  determinants 
of  entrepreneur  cost — to  the  situation  facts — and  to  a  discussion  of  the 
distributive  process,  and  to  an  examination  of  the  fixation  of  the 
distributive  shares,  that  the  problem  of  interest  is  logically  before  us. 

But  practically  speaking,  in  the  exigencies  of  exposition,  it  has 
seemed  necessary  to  treat  the  problem  of  interest  here,  in  order  to 
determine  what  interest  payments  really  are,  and  upon  what  sort  of 
capital  they  are  computed,  and  to  justify  their  inclusion  as  they  are  in 
costs ;  and  then  finally  to  get  out  of  our  path  all  other  associated 
questions  of  the  ultimate  basis  of  interest  and  of  the  process  of  its 
determination. 


194  VALUE  AND  DISTRIBUTION 

purposes,  and  other  premiums  offered  by  different  entre- 
preneurs for  the  wherewithal  to  acquire  present  instru- 
mental goods,  and  with  varying  dispositions  on  the  part  of 
savers  to  save,  and  of  possessors  of  wealth  to  abstain  from 
its  consumption,  and  with  varying  dispositions  on  the  part 
of  owners  of  wealth  to  exploit  their  own  possessions,  there 
should  result,  through  the  value  mechanism  of  the  market, 
a  ratio  of  exchange,  a  discount  rate,  between  the  standard 
as  a  present  fact  and  the  standard  as  a  future  fact. 

But  now,  assuming  that  for  the  time  we  have  questions 
enough  and  possible  solutions  enough  before  us,  it  may 
somewhat  illuminate  the  problem,  as  well  as  somewhat 
further  the  solution,  the  while,  however,  possibly  raising 
more  questions,  if  we  turn  to  examine  for  a  little  the  details 
of  the  treatment  of  the  problem  by  several  of  those  authors 
who  appear  best  to  have  appreciated  its  difficulty,  and  who 
have  most  contributed  to  its  solution. 

Boehm-Bawerk's  explanation  of  interest  rests  in  part 
upon  the  technological  productivity  of  capital  and  in  part 
upon  the  principle  of  perspective  in  consumption — this 
latter  expressing  the  preference  commonly,  though  not 
always,  felt  for  the  present  good  as  consumable  item,  over 
against  the  future  good — his  definition  of  interest  running 
"a  difference  in  value  between  present  and  future  goods 
in  favor  of  the  former."  - 

That  "perspective"  means  merely  the  indisposi- 
tion to  postpone  consumption,  and  is  thus  the  same 
thing,  under  another  name,  as  abstinence,  would  per- 
haps not  be  admitted  by  Boehm-Bawerk ;  this  would  sound 
too  much  like  a  cost  view — whether  pain  cost  or  some  other 
type  of  cost — and  thus  would  not  fit  well  into  the  demand- 
utility  point  of  view  in  the  explanation  of  value.  In  the 
main,  however,  Boehm-Bawerk's  emphasis  is  upon  produc- 
tivity, perhaps  because  the  "perspective"  doctrine  has, 
under  its  aspect  of  abstinence,  been  already  sufficiently 
emphasized. 

^  Positive  Theory  of  Capital,  p,  273. 


INTEREST  195 

But,  according  to  Boehm-Bawerk,  all  sorts  of  errors 
have  associated  themselves  with  this  principle  of  produc- 
tivity. One  hundred  dollars'  vv^orth  of  capital,  or  one 
hundred  dollars'  worth  of  labor,  must  be  accounted  produc- 
tive even  though  productive  of  only  fifty  dollars  worth  of 
product.  Smart  has  thus  summarized  this  particular  aspect 
of  the  argument : 

Capital  would  still  be  productive  though  it  produced  no  inter- 
est,    e.g.,     if     it     increased     the     supply     of     commodities     the 

price    of    which    fell    in   inverse    ratio The    [productivity] 

theory  ....  does  not  explain  why  capital  employed  in  produc- 
tion   regularly    increases    to    a    value    greater    than    itself 

The      theory      that      explains      interest      must      explain      surplus 

value Labor   by    no    means    always    produces    more    value 

than  it  consumes.  But  the  plausibility  of  the  productivity  theory 
is  the  parallelism  it  assumes  between  labor  and  capital,  the  sug- 
gestion that  interest  is  wages  for  capital's  work.  But  .... 
value   cannot    come    from    production.      Neither    capital    nor    labor 

can  produce  it What  labor  does  is  to  produce  a  quantity 

of  commodities,  and  what  capital  co-operating  with  labor  usually 
does  is  to  increase  that  quantity.  [And  the  value  may  or  may  not 
be  more.]  How  ....  can  it  be  that  capital  employed  in  pro- 
duction not  only  reproduces  its  own  value,  but  produces  a  value 
greater  than  itself?^ 

Boehm-Bawerk  accepts  the  distinction  between  land 
instruments  and  non-land  instruments,  and  rules  out  these 
former,  together  with  consumption  goods,  from  the  capital 
category :  "Objects  of  immediate  consumption  .... 
and  land,  as  not  produced,  stand  outside  our  conception  of 
capital.  It  does  not  fall  within  our  province  to  go  into  the 
theory  of  land  rent."  * 

Certainly  the  principle  of  "perspective" — of  abstinence 
— does  not  apply  to  land  instruments  directly,  since  they  are 
not  consumption  goods :  but  this  would  apply  equally  well 
to  cut  out  most  other  instrumental  goods.  True,  the  non- 
land  instruments  could  be  marketed,  or  worn  out,  and  their 
price  used   for  immediate  consumption  wants ;  but  this  is 

'  Eugen  V.  Boehm-Bawerk,  Capital  and  Interest,  translated  by 
William  Smart,  Introduction,  p.  ii. 

^Ibid.,  p.  6. 


196  VALUE  AND  DISTRIBUTION 

equally  true  of  land.  The  notion  of  abstinence  applies, 
then,  equally  to  either,  unless  in  the  sense  of  the  original 
labor  of  production — an  argument  from  origins,  and  not  a 
technological  argument — a  line  of  distinction  in  no  wise 
applicable  for  competitive  purposes,  because  beyond  the 
possibility  of  application.  No  one  can  possibly  tell  what 
part  of  land  fertility  is  or  is  not  produced ;  and,  for  pur- 
poses of  competitive  production,  or  of  personal  abstinence 
in  a  competitive  society,  no  one  could  have  the  slightest 
interest  to  inquire. 

But  of  course  it  may  nevertheless  be  true  that  the  theory 
of  land  rent  in  no  wise  concerns  the  theory  of  interest ; 
possibly  enough,  no  question  of  rentals  of  any  sort  and  no 
question  of  any  hire  or  remuneration  upon  any  kind  of  pro- 
ductive instruments  or  agents  can  have  any  bearing  upon 
the  rate  of  time  discount ;  this  is,  indeed,  one  of  our  diffi- 
cult problems ;  but  if  other  rents  and  hires  have  this  bear- 
mg,  so  also  have  land  rents;  if  others  have  not,  land  rents 
have  not.  At  any  rate,  next  year's  rent  has  to  be  discounted 
in  order  to  get  it  into  a  present  value,  and  the  entire  series 
of  future  rents  have  to  be  discounted  to  find  a  present 
market  value  for  the  land  or  other  instrument ;  and  it  is 
clear  that  land  is  a  future  good  as  much  as  is  any  other 
instrument,  and  is  paid  for  as  are  other  instruments,  accord- 
ing to  the  duration  of  the  use  granted. 

Before  productivity  can  be  used  to  explain  discount, 
explanation  must  be  found  for  the  division  of  the  gross 
result  of  capital  into  original  fact  and  surplus  fact ;  and 
this  upon  the  face  of  it  would  not  appear  to  be  difficult. 
We  started  with  100  in  value — [price?] — and  come  out  with 
105  ;  mere  inspection  would  seem  to  suffice  for  the  discovery 
of  a  surplus  of  5.  Yes,  but  why  is  it  that  the  100  that 
would  accomplish  this  thing  was  worth  only  100  in  the 
beginning?  To  get  the  100  of  present  value  as  the  capital 
residuum  after  the  surplus  is  deducted,  we  have  to  make 
use  of  this  5  as  the  discounted  surplus ;  and  it  does  not 
then  seem  open  to  explain  the  existence  of  the  5  by  deduct- 
ing the  100  from  the  gross  105. 

The  adherents  [of  the  productivity  theory]  ....  understand 
it  as  meaning  that,  by  the  aid  of  capital,  more  is  produced;  that 
capital  is  the  cause  of  a  particular  productive  surplus  result 


INTEREST  197 

The  words  "to  produce  more"  or  "a  productive  surplus  result" 
may  mean  one  of  two  things.  They  may  either  mean  that  capital 
produces    more  goods   or   more   value,   and   these    are    in    no    way 

identical 

That  "capital  is  productive"  ....  may   signify   four   things : 

1.  Capital  has  the  capacity  of  serving  towards  the  production 
of  goods. 

2.  Capital  has  the  power  of  serving  towards  the  production 
of  more  goods  than  could  be  produced  without  it. 

3.  Capital  has  the  power  of  serving  towards  the  production  of 
more  value  than  could  be  produced  without  it. 

4.  Capital  has  the  power  of  producing  more  value  than  it  has 
in  itself.'' 

Neither  from  the  point  of  view  of  inadequacy  nor  of 
irrelevancy  need  Boehni-Bawerk's  criticism  of  proposition 
I  detain  us  long ;  proposition  2  he  rightly  declares  to  be  use- 
ful only  as  subordinate  to  3  and  as  somehow  serving  as  the 
basis  of  3 ;  and  then  must  be  confronted  the  difificulty  of 
getting  4  out  of  3. 

Capital  does  not  produce  alone;  but  it  is  certain  that 
capital  and  other  production  goods  working  together  get  a 
greater  total  of  results  by  weight  and  tale  than  can  be  had 
without  the  capital.  But  the  first  difficulty  (by  Boehm- 
Bawerk  hardly  touched,  but  by  Wieser  adequately  recog- 
nized) is  to  find  out  why,  in  the  distributive  process,  capital 
gets  any  part  of  this  surplus,  or  does  not  get  more  or  all 
of  it,  and  does  get  just  what  we  find  it  getting.  This,  how- 
ever, may  be  regarded  as  a  problem  in  distribution,  and, 
perhaps,  for  the  time  being,  may  be  taken,  without  further 
ado,  as  solvable,  and  as  solved ;  that  is  to  say,  the  theory 
of  capital  rent  may  possibly,  for  the  purpose  of  the  present 
argument,  be  set  out  of  the  discussion,  precisely  as  Boehm- 
Bawerk  has  in  fact  declined  to  enter  upon  any  consideration 
of  the  theory  of  land  rent.  Even  so,  however,  this  other 
work  will  have  to  be  assumed  to  have  been  elsewhere  done. 
But  Boehm-Bawerk  does  not,  so  far  as  non-land  instru- 
ments are  concerned,  appear  to  have  assumed  this,  but 
rather  to  have  taken  it  as  part  of  his  problem,  and  then  to 
have  omitted  the  necessary  anaylsis;  but  we  shall  see. 

But  at  any  rate,  admitting  that  to  capital,  in  the  co- 
operative production  process,  more  goods  or  better  goods 
can  be  traced  and  ascribed  and  accounted,  this  falls  a  good 

^  Ibid.,  pp.   1 1 3-1 S- 


198  VALUE  AND  DISTRIBUTION 

way  short  of  proving  that  the  value  of  this  larger  sum  is 
greater  than  the  ralue  of  the  original  holding.  For  (i) 
how  make  sure  that  the  105  goods  have  the  more  of  value 
over  the  100?  and  (2),  this  explained,  how  then  explain 
that  the  100  of  original  holding  did  not  forthwith  take  on 
this  105  of  value? 

Does  the  fact  that  capital  when  employed  is  regularly  followed 
by  the  appearance  of  a  surplus  in  value,  actually  contain  a  sufficient 
proof  that  capital  possesses  a  power  to  create  value?  ....  Is 
the  appearance  of  the  snow  a  sufficient  proof  that  a  magic  power 
resides  in  the  summer  snow  to  force  up  the  quicksilver?  .... 
Value  is  not  produced  and  cannot  be  produced.  What  is  produced 
is  never  anything  but  form,  shape,  material,  combinations  of 
material ;  therefore  things,  goods.  These  goods  do  not  bring  value 
with   them    ready   made,    as    something   inherent    that    accompanies 

production Value  grows  not  out  of  the  past  of  goods  but 

out  of  the  future.  It  comes,  not  out  of  the  workshop  where 
goods  come  into  existence,  but  out  of  the  wants  which  these  goods 
will  satisfy.     Value  cannot  be  forged  like  a  hammer  or  woven  like 

a  sheet What  production  can  do  is  never  anything  more 

than  to  create  goods,  in  the  hope  that,  according  to  the  anticipated 
relations  of  demand  and  supply,  they  will  obtain  value." 

That  capital  does  not  directly  produce  value  or  surplus 
value,  but  only  the  things  that  have  value,  or  that  have 
value  in  excess  of  the  original  value,  must  be — for  what- 
ever it  is  worth — adinitted.  Nor  does  it  matter  to  the  con- 
trary that  all  of  this  insistence  upon  value  being  derived 
from  wants — from  utility  motiving  demand,  rather  than  in 
any  part  upon  the  supply  situation — is  of  most  dubious 
doctrinal  validity.  It  still  remains  true  that  (i)  the  emer- 
gence of  a  surplus  in  value  needs  more  proof  than  the  mere 
existence  of  an  increased  volume  of  goods;  and  (2)  this 
value  step  being  accomplished,  the  problem  would  then 
exist  of  explaining  why  the  greater  value  of  the  result  was 
not  forthwith  reflected  back  upon  the  instrument,  to  the 
final  cancellation  of  the  surplus  first  established.  But  evi- 
dently all  of  this  discussion  on  the  part  of  Boehm-Bawerk 
must  assume  the  quantitative  comparability  of  an  earlier 
with  a  later  value.  But  if  there  is,  in  the  nature  of  the  case, 
as  has  been  in  earlier  pages  argued,  no  such  thing  possible 

"Boehm-Bawerk,  op.  cit.,  pp.  133,  134. 


INTEREST  199 

as  this  comparison  of  values,  what  then  remain  to  be 
compared  ? 

Is  comparison  more  practicable  between  present  goods 
and  future  goods?  This  has  also  been  shown  to  be 
impossible,  even  were  it  not  the  fact  that  the  case  actually 
presented  by  capital  productivity  is  one  of  production 
instruments  at  the  beginning,  and  of  consumption  goods 
at  the  close.  This  objection  has  been  forcibly  urged  by 
Wieser : 

Do  the  arms,  bows,  and  nets — the  capital  of  von  Thumen's 
illustration— really  reproduce  themselves  in  the  strictest  sense  of 
the  term?     Certainly  not.     They  produce  nothing  but  fish  and  the 

spoils  of  the  chase The  return  which,  in  the  first  instance, 

falls  to  be  imputed  to  them  is,  consequently,  a  gross  return  in 
foreign  things  ....  things  with  which  they  may  possibly  be 
compared  in  value  but  not  in  quantity The  same  argu- 
ment holds   for  capital  in  the  developed  economy,  only  that  here 

the     conditions     are     somewhat     more     complicated No 

capital  ....  directly  reproduces  itself;  each  produces  first  a 
gross  value  in  foreign  things,  in  which,  physically,  its  productivity 
cannot  be  seen.  The  capital  of  a  baker  produces  bread,  that  of  a 
miller,  meal,  that  of  a  peasant,  grain.  In  order  that  the  baker  may 
replace  his  capital  again  ....  the  gross  return  ....  must  be 
exchanged  against  the  gross  return  of  other  capitals,  indeed, 
against  those  returns  which  are  attributed  to  land  and  labor,  in 
order  that  the  capital  may  be  replaced,  and  the  net  return  physically 
cognizable.'' 

Von  Wieser's  solution  of  the  difficulty  is,  seemingly, 
an  appeal  to  the  facts  of  distribution,  to  the  rental  remu- 
neration apportioned  to  capital  through  the  competition  of 
entrepreneurs.  To  the  detail,  the  mechanism,  and  the 
processes  of  this  distributive  imputation,  Wieser  especially 
devotes  attention.  As  for  Boehm-Bawerk,  as  has  been 
already  noted,  this  distributive  result  is  taken  for  granted; 
for  us,  however,  the  only  fact  of  present  importance  is 
this — that  to  explain  rentals  or  to  assimie  their  explanation 
is  not  to  explain  interest,  although  the  explanation  of 
interest  may — or,  for  that  matter,  may  not — be  somehow 
hidden  in  the  phenomenon  of  rentals.^ 

^  Friedrich  von  Wieser,  Natural  Value,  edited  with  a  preface  and 
analysis  by  William  Smart,  translated  by  Christian  A.  Malloch.  Mac- 
millan,   1893    (original,  Der  natiirliche   Wert,   Prag,    1888), 

*  "The  task  of  our  theory  is,  in  the  last  resort,  to  prove  the  value 
productivity   of   capital ;   but    for   this   purpose   it   is   necessary   first   to 


200  VALUE  AND  DISTRIBUTION 

Our  present  quarrel  is,  however,  essentially  one  with 
the  explanation  of  capital  rental  as  given  by  Boehm- 
Bawerk.  He  insists  strongly  that  the  problem  is  (i)  a 
value  problem;  (2)  a  surplus-value  problem;  the  lack  of 
clear  appreciation  of  this  value  problem  is,  indeed,  the 
gravamen  of  his  complaint  against  all  preceding  interest 
theory.  And  why  is  it  necessarily  a  value  problem? 
Otherwise  there  can  come  out  of  the  situation  analyzed  no 
surplus  value.  But  in  addition — and  this  receives  all 
emphasis  at  the  hands  of  Boehm-Bawerk — the  problem 
must  be  fundamentally  one  of  goods,  and  at  the  same  time, 
of  goods  that  are  of  comparable  quality,  for  there  could  be 
no  value  productivity  unless  as  based  upon  physical  pro- 
ductivity. 

Wieser's  first  criticism  of  Boehm-Bawerk's  position 
was,  then,  that  even  with  physical  productivity  there  could 
result  no  value  productivity,  unless  as  the  outcome  of  some 
distributional  process,  or  processes,  more  or  less  mysterious 
and  more  or  less  shrilly  calling  for  elucidation. 

prove  the  fact  of  physical  productivity  [gross,  not  net,  one  assumes] 
as  the  scaffolding  on  which  the  other  rests.  The  value  productivity 
already  presupposes  the  determination  of  the  value  of  capital,  but  the 
value  of  capital  can  only  be  determined  when  the  question  of  how  to 
impute  the  physical  return  has  been  answered,  because  the  value  of 
capital  rests  on  the  share  of  return  imputed  Isugerechnef]  to  it. 
Just  as  the  rent  must  first  be  ascertained  before  the  value  of  any  land 
can  be  calculated,  and  just  as,  generally  speaking,  the  rules  of  imputa- 
tion must  be  recognized  before  the  value  of  production  goods  can  be 
determined,  so  must  also  the  imputation  of  the  return  to  capital  first 
be  settled  before  we  can  take  up  the  problem  of  its  value." — Wieser, 
op.  cit.,  p.   126. 

"The  theory  of  interest,  like  that  of  rent,  has  always  been  dis- 
cussed ....  without  any  previous  examination  of  the  general  laws 
of    imputation.      The    result,    however,    as    regards    interest,    has    been 

immensely  less  satisfactory  than  as  regards  rent In  the  case 

of  interest,  we  have  to  deal  with  the  essential  fact  in  the  problem  of 
imputation,  while  in  the  case  of  rent  we  have  to  deal  substantially 
with  a  detail  capable  of  being  conceived  by  itself,  that,  namely,  of  the 
differential  imputation." — Ibid.,  p.    128,  note. 

But,  after  all,  it  is  evident  that  three  steps  are  involved  in  any 
complete  proof — (i)  physical  productivity,  (2)  net  value  productivity, 
(3)  discount.  And  it  is  as  to  this  third  step,  the  derivation  of  the  fact 
of  discount  upon  rentals  from  the  mere  fact  of  rentals,  if  indeed,  the 
derivation  can  be  accomplished,  that  Wieser's  account  of  the  case 
appears  to  be  seriously  lacking. 


INTEREST  20I 

But  Boehm-Bawerk  answered — not  to  Wieser,  but  to 
Clark,  although  Wieser's  criticism  came  earlier  than  that 
of  Clark,  Wieser  1888,  Clark  1893 — that  if  a  productivity 
could  be  established  such  that  less  goods  of  an  earlier 
time  could  be  set  over  against  more  goods  of  a  later  time, 
and  if  an  increase  of  this  kind  could  be  established  as  gen- 
eral over  the  entire  field  of  capital  employment,  a  value 
productivity  could  thereupon  be  inferred. 

It  is,  then,  at  this  point  that  the  notable  controversy 
between  Professor  Boehm-Bawerk  and  Professor  John  B. 
Clark  comes  so  exactly  to  fit  our  need.  Clark's  attack," 
aside  from  its  abstract-capital  arguments  and  aspects  which 
do  not  at  present  concern  us,  was  precisely  along  the  line 
of  Wieser's  criticisms  as  to  the  nature  of  physical  pro- 
ductivity. Clark  makes  it  clear  that  it  is  "not  the  recogni- 
tion of  time  as  an  element  in  the  problem  of  interest"  that 
he  would  criticize,  "but  the  manner  in  which  time  is  made 
to  act."  In  reality,  "time  does  not  put  a  discount  upon  par- 
ticular goods ;  particular  concrete  goods  are  not,  in  actual 
life,  subjected  to  comparison.  It  is  not  the  driving-horse 
of  '93  that  is  compared  with  one  in  '94."  The  capitalist 
does  not  decide,  if  he  buys,  to  buy  a  horse,  and  finally  con- 
clude to  do  the  buying  at  the  end  of  a  year.  Nor,  in  fact, 
do  the  rainy-day  savers — "quasi-capitalists"  Clark  calls 
them,  since  they  have  not  definitively  abandoned  all  idea  of 
consumption,  but  are  merely  postponing — nor  do  these 
rainy-day  people  have  in  mind 

goods   of   like   kind   and   quantity The    marked    antithesis 

between  that  which  they  forego  today  and  that  which  they  expect 
to  purchase  later  affords,  indeed,  the  motive  for  their  postponing. 
They  do,  no  doubt,  compare  a  sum  of  wealth  [But  do  they?  or  only 
a  sum  of  weal — an  aggregate  of  expected  services  commanded  by 
alternatives  of  purchasing  power?]  existing  today  with  a  like  sum 
to  be  used  later. 

Clark  attributes  the  error  charged  to  Boehm-Bawerk  to 
the  acceptance  of  the  notion  of  capital  as  concrete  goods : 

*  "The  Genesis  of  Capital,"  Yale  Review,  Vol.  II,  p.  302  (Novem- 
ber,   1893). 


202  VALUE  AND  DISTRIBUTION 

For  the  common  and  practical  conception  of  capital  as  a  perma- 
nent fund  or  amount  of  wealth  expressible  in  money  though  not 
actually  embodied  in  money,  there  is  substituted  the  conception  of 
concrete  goods  distinguishable  from  others  by  the  place  that  they 
occupy  in  the  order  of  industrial  phenomena. 

For  evidently,  it  is  insisted,  if  capital  at  the  outset  and 
capital  in  a  later  aspect  are  to  be  compared,  there  will  have 
to  be  a  comparison  of  concrete  tangible  goods,  or  of  these 
goods  as  expressed  in  some  measure.  And  Clark  insists 
that  this  comparison  is  actually,  commercially,  experien- 
tially,  not  of  goods  of  like  kind  and  quantity;  if  it  is  at  all 
a  comparison  of  concrete  goods  it  must  be  of  machinery 
for  production  with  products  for  consumption ;  failing  this, 
it  must  be  of  two  aggregates  of  value — of  two  "sums  of 
wealth,"  or  of  "amounts  of  wealth  expressible  in  money;" 
and  at  this  point  Clark  declares  himself  as  standing  for  the 
money  expression. 

But  is  it  possible  to  express  value  under  any  other  form, 
to  give  it  any  denominator  intelligible  as  between  different 
men,  otherwise  than  in  terms  of  some  conventional  stand- 
ard ?  In  truth,  when  capital  is  expressed  as  a  value  quantity, 
is  there  anything  for  it  but  to  use  the  money  standard? 
Capital  is  wealth  under  the  money  denominator, 
since  there  is  no  other  denominator  possible.  For  ordinary 
purposes,  truly,  this  dift'erence  between  value  and  price  is 
not  significant.  But  for  purposes  of  comparison  over 
intervals  of  time  or  space,  the  difference  is  theoretically  of 
fundamental  import.  For,  whatever  may  be  the  truth  for 
current  exchanges,  it  is  clear  that  for  deferred-payment 
relations  the  only  possible  device  for  comparison  must  be 
found  in  some  conventionally  adopted  standard  of  com- 
parison. 

But  all  this  is,  to  the  individual,  not  so  very  different 
from  a  value  comparison ;  it  is,  for  his  purposes,  unlike  the 
ordinary  non-deferred  payment  case  only  in  this,  that,  with 
the  deferred  payment,  each  of  the  articles  compared  is  an 
*  item  out  of  an  entirely  dift'erent  system  of  value  exchanges 
from  that  of  the  other.  Prices  in  current  exchanges  are 
merely  and  simply  value  phenomena  expressed  in  some  one 
commodity  intermediate,  conventionally  selected  for  the 
purpose.    As  value  phenomena,  value  items,  two  prices  out 


INTEREST  203 

of  distinct  systems  of  exchange  relations  are  not  possible 
of  comparison ;  the  equality  or  inequality  is  merely  one  in 
terms  of  two  bullion  weights  out  of  different  value  situa- 
tions and  systems.  That  the  market  price  of  a  given  horse 
is  today  $100  is  the  expression  of  a  value  relation  between 
horse  and  metal ;  that  the  payment  will  be  made  a  year 
from  today  in  $105  is  simply  to  say  that  a  certain  promised 
quantum  of  metal, — an  aggregate  of  items  out  of  a  later 
value  system,  and,  from  the  point  of  view  of  the  present, 
of  an  unknowable  exchange  significance  in  that  system, — is 
today  exchangeable  against  the  horse  or  against  its  equiva- 
lent 100  items  of  metal ;  no  equivalence  in  value  between  the 
two  sums  of  items  of  metal  is  asserted  in  any  other  sense 
than  as  a  mere  repetition  of  the  brute  and  opaque  fact  that 
the  100  and  the  105  are  exchanging  against  each  other. 

Up  to  this  point  there  is,  then,  nothing  but  commenda- 
tion to  be  accorded  to  Clark's  formulation.  It  is,  however, 
true — or  seemingly  true — that  he,  as  well  as  Boehm- 
Bawerk,  assumes  for  capital  a  concrete  tangible  material 
basis,  as  a  body  of  existing  material  things,  out  of  which 
the  money  or  value  situation  proceeds,  and  for  which  it 
stands ;  that  is  to  say,  his  concept  of  capital  requires,  as  the 
basis  of  the  capital,  an  existing  sum  of  industrial  goods 
and  intermediate  products,  social  capital,  but,  all  the  while, 
subjected  to  a  competitive,  individualistic  value  adjust- 
ment. But  in  point  of  fact,  as  his  corporation-illustration 
of  capital,  a  favorite  with  him,  shows,  this  price  or  value- 
denominator  form  of  capital  may  be  invested  in  all  the 
various  sorts  of  marketable  or  intermediately  advantageous 
facts  ;  there  is  no  certainty — there  is,  indeed,  no  probability — 
that  the  total  corporate  capital  ever  will  be, — or  even  if  it 
ever  is,  will  long  remain,  made  up  in  its  entirety  of  social 
capital  as  distinguished  from  consumption  goods,  rights, 
claims,  franchises,  good-will,  and  such  other  assets  of 
similarly  non-concrete  character  as  a  going  business  con- 
cern may  find  to  its  purpose. 

Boehm-Bawerk  appears  to  accept  a  goodly  share  of 
Clark's  contention,  still,  however,  making  shift  somehow  to 
keep  up  with  his  talk  of  "goods." 

According  to  my  view  the  superiority  of  present  over  future 
goods  is  based  upon  the  very  fact  that  one  can,  as  a  rule,  make  a 
different  and  more  advantageous   use  of  goods   now  present   than 


204  VALUE  AND  DISTRIBUTION 

one  can  make  of  an  equal  quantity  [?]  of  goods  [?]  which  are  not 
to  be  at  one's  disposal  until  some   future  moment.'" 

But  what,  Boehm-Bawerk  asks,  can  this  equal  quantity 
of  goods  be,  if  not  the  same  quantum  of  the  same  kind  of 
goods?  What  sort  of  equaUty  and  what  guarantee  of 
equality  can  there  otherwise  be? 

According  to  my  theory,  the  man  who  saves  will  weigh  whether 
the  two  hundred  florins  will  have  a  greater  value  [  subjective 
value?  ulitity?  service?]  for  him  if  consumed  now  as  "present 
dollars,"  or  if  reserved  for  like  use  as  "future  dollars."  .... 
Strictly  speaking,  the  example  chosen  by  Professor  Clark  is  not  a 
case  of  comparing  present  and  future  "goods"  but  only  one  of 
comparing  present  and  future  uses  of  the  same  sum  of  wealth 
[money?  purchasing  power  in  terms  of  money?].  But  .... 
the  decisive  ideas  are  the  same." 

And  still  insisting  that  he  has  not  hereby  abandoned 
his  comparison  of  goods  of  "like  kind  and  quantity,"  and 
declining  to  admit  that  he  has  gone  over  to  a  mere  equality 
in  terms  of  the  conventional  standard,  Boehm-Bawerk 
continues : 

Why  do  I  add  to  my  proposition  that  present  goods  are  worth 
more  in  the  average  than  future  goods,  the  further  qualification 
that  they  are  worth  more  than  goods  of  like  kind  and  quantity? 
Simply  because   that   without   the   second   half   of   the   proposition, 

the   first  half   would  be  neither   intelligible   nor   complete 

To  express  clearly  and  correctly  the  superiority  which  difference 
of  time  gives  present  goods  over  future  goods  one  must  compare 
things  of  like  kind,  for  example,  dollars  with  dollars,  and  not 
diamonds  with  pebbles,  and  of  like  quantity,  one  thousand  with  one 

thousand,    and    not    one    thousand    with    two    thousand 

Especially  would  it  be  inadmissible  ....  to  place  over  against 
each     other     like     sums     of     value,     instead     of     like     sums     of 

wealth One  would  have  to  make  the  logically  inconsistent 

assertion   that   a   certain  present   value   is   greater   than   an   equally 

great  future  value Professor   Clark  speaks   of   a  "sum  of 

wealth,"  or  an  "amount  of  wealth."  ....  But  ....  if  Pro- 
fessor Clark  would  force  himself  to  a  precise  definition  of  his 
meaning,  he  would  have  to  assert  either  exactly  what  I  assert,  or 

"  "The  Positive  Theory  of  Capital  and  Its  Critics,"  Quar,  Jour,  of 
Econ.,  Vol.  IX,  p.  ii8  (January,   1895). 

"  Ibid.,  p.  117. 


INTEREST  205 

something  positively  false For  either  he  would  mean  by 

his  amount  of  wealth  an  amount  of  goods,  and  in  this  sense,  if  he 
is  to  demonstrate  the  superiority  of  present  goods,  he  must  neces- 
sarily have  reference  ....  to  goods  "of  like  kind  and  quantity," 
or  he  means  an  amount  of  value,  and  then  the  assertion  .... 
contains  the  self-contradiction  just  criticised." 

And  this  would,  indeed,  be  a  serious  difficulty  if,  as 
Boehm-Bawerk  assimies,  the  alternatives  presented  offered 
the  only  possible  solutions.  But  there  is  all  the  while  the 
third  possibility,  that  of  the  equality,  in  the  present  reckon- 
ing, of  a  future  quantum  of  the  standard  with  a  present 
quantum  of  the  standard. 

And  all  the  while  Boehm-Bawerk  stoutly  insists  that  he 
is  abiding  by  his  notion  of  capital  as  concrete  tangible 
goods,  exclusive,  one  still  assumes,  of  land. 

But  Clark,  in  his  rejoinder/^  insisting  that  the  very  state- 
ment of  the  interest  problein  conceives  the  case  in  terms  of 
a  fund  and  of  income  upon  this  fund  and  not  in  terms  of 
concrete  capital  goods,  mercilessly  forces  home  the  "com- 
parison" issue.  He  denies  that  $1,000  at  one  time  and 
$1,000  at  another  time  can  compare  goods  of  like  kind 
and  quantity,  though  of  course  admitting  that  these  dollars 
are,  in  a  sense,  themselves  goods  of  like  kind  and  quantity : 

'  The  sum  in  the  present  will  buy  certain  things,  and  a  like  sum 
hereafter  will  buy  different  things.  Professor  Boehm-Ba- 
werk ....  compares  present  and  future  goods  of  like  kind  and 
number,  because  he  compares  present  dollars  with  future  dol- 
lars  .[The  possessor  of  present  wealth]  compares  two  dif- 
ferent subjective  values  obtainable  by  two  different  modes,  of 
spending  present  money 

He  objects  to  Boehm-Bawerk's  fashion  of  bringing 
money  into  the  discussion,  and  then  of  objecting  to  "sums 
or  quantities  of  wealth The  things  to  be  com- 
pared are  a  dollar's  worth  of  whatever-you-please  now  and 
a  dollar's  worth  of  whatever-you-please  hereafter." 

Nothing  better  than  this  or  more  clarifying  for  the 
purposes  of  the  present  discussion  could  be  asked,  nothing 

^^  Ibid.,  pp.  125,  126. 

""The  Origin  of  Interest,"  Quar.  Jour,  of  Econ.,  Vol.  IX,  p.  257 
(April,  1895). 


2o6  VALUE  AND  DISTRIBUTION 

more  conclusive  also,  and  it  is  hardly  gracious  to  stop  to 
regret  that  Professor  Clark  appears  to  believe  that  what  a 
capitalist  "really  estimates  is  like  quantities  of  wealth  meas- 
urable in  money ;"  for  really  the  measurement  function  is 
not  present.  But  for  the  purposes  presently  in  hand  this 
is  mostly  an  irrelevant  inaccuracy. 

The  discussion — this  aspect  of  it — closes  with  Boehm- 
Bawerk's  practical  admission  of  the  entire  charge  made 
against  him :  "Professor  Clark  seems  to  assume  that  I 
have,  in  my  last  article,  'introduced  into  the  problem  for  the 
first  time'  the  case  of  money In  this  he  is  mis- 
taken, etc. ;"  for  Boehm-Bawerk  asserts  that  he  has  done 
the  thing  over  and  again  in  the  Positive  Theory — in  all  of 
which  the  truth  is  clearly  with  Boehm-Bawerk — the  more 
so,  the  more  unfortunately  for  him,  for  in  precisely  so  far 
is  he  disloyal  to  the  doctrine,  as  held  by  him,  of  the  con- 
creteness  of  capital,  and  even  more  obtrusively  disloyal  to 
his  comparison  of  "like  kinds  and  quantities  of  goods."  ^* 

Bearing  in  mind  that  Boehm-Bawerk  stands  for  capital 
as  concrete  non-land  forms  of  wealth,  and  repudiates  in 
terms — whatever  else  he  does  impliedly — the  value  or  price 

"  "The  Origin  of  Interest,"  Quar.  Jour,  of  Econ.,  Vol.  IX,  p.  380. 

The  fact  that  concrete  items  of  commodity,  like  ice,  wine,  or 
wheat,  often  increase  in  value  with  keeping,  appeals  to  Macfarlane 
(Charles  W.  Macfarlane,  "Value  and  Distribution,"  Lippincott's,  1900, 
p.  196)  as  "of  course  fatal  to  the  contention  that  present  goods  are,  as 
a  rule,  worth  more  than  future  goods." 

These  cases  might  properly  be  used  to  compel  a  retreat  by  Boehm- 
Bawerk  from  his  position  that  capital  is  a  category  of  concrete  goods, 
to  the  tenable  ground  that  capital  is  the  price  aspect  of  the  concrete 
goods ;  but  so  far  from  being  inconsistent  with  the  doctrine  that 
present  values  command  an  agio  over  future  values,  the  wine  case,  at 
least,  is  an  illustrative  case  of  a  capitalistic  process  taking  place  in 
time,  Boehm-Bawerk  stands  for  the  view  that  ten  dollars'  worth  of 
ice  or  wine  or  wheat  of  next  year  is  not  worth  ten  dollars  now.  This  is 
not  inconsistent  with  the  fact  that  waiting  till  next  year  may  change  ten 
dollars'  worth  of  present  commodities  into  a  then  sum  of  value  greater 
than  ten  dollars.  The  future  value  does  not  now  rank  as  equal  to  a 
present  value  of  the  same  denomination,  but  with  time  a  change  takes 
place  in  the  volume  of  value,  and  for  that  reason  the  waiting  is  done. 
True,  as  Macfarlane  argues,  the  increase  in  value  may  arise,  as  in  the 
case  of  the  wine  or  of  the  wheat,  through  changes  in  the  demand  ;  but 
this  is  merely  to  say  that  a  year  from  now  the  then  value  will  be 
greater  than  is  the  nozv  value,  not  that  the  future  good  is  now  more 
valuable  than  the  present  good. 


INTEREST  207 

expression  as  an  essential  element  in  the  capital  concept 
for  the  existing-  competitive  organization  of  society,  some 
attention  must  now  be  directed  to  his  interpretation  of 
roundabontness  in  capitalistic  production  as  bearing  upon 
interest  theory.  His  proposition  seems  to  be  that,  with  a 
given  development  of  technique,  only  a  limited  volume  of 
capital  can  be  applied  to  production,  at  any  given  degree  of 
directness  in  productive  methods ;  that  only  on  terms  of 
increasing  roundaboutness  can  a  market  for  more  capital, 
and  scarcity  for  any  capital,  become  possible ;  and  that 
increasing  roundaboutness  necessitates  or  implies  the  fact 
of  diminishing  returns. 

We  shall,  in  a  later  chapter,  have  occasion  to  question 
this  alleged  necessity  of  diminishing  return  anywhere  in 
the  dynamic  field — whether  for  land  or  capital  or  labor — 
excepting  upon  the  underlying  assumption  that  the  different 
factors  in  production  or  the  different  sorts  of  instru- 
mental goods  are  manifesting  dift'erent  rates  of  increase, 
as,  indeed,  they  commonly  are.  But  in  the  actual  situation 
of  things,  Boehm-Bawerk  is  doubtless  right  in  his  conten- 
tion that  capital  goods  tend,  at  present,  toward  diminishing 
productivity  in  some  sense,  not  altogether  clear,  either  of 
product  by  weight  and  tale,  or  of  product  by  utility  meas- 
ure, or  of  product  by  value  measure.  There  is  a  limit  to 
the  instruments  that,  in  any  given  situation  of  technique, 
of  labor,  and  of  land,  can  be  absorbed  without  diminishing 
advantage.  There  is,  however,  nothing  to  show  that  this 
fact  of  diminishing  return  is  due  to  greater  technological 
roundaboutness ;  there  would,  in  truth,  be  this  same  law  in 
more  obtrusive  manifestation,  were  the  productive  period 
not  possibly  to  be  lengthened ;  and  there  might  be  increas- 
ing volumes  of  capital  consistently  with  shorter  periods  of 
production — shorter  processes. 

Yet  surely  it  is  true  that  "every  extension  of  the  pro- 
ductive process  leads  generally  to  some  surplus  result,"  ^' 

"  The  use  by  Boehm-Bawerk  of  this  roundaboutness  doctrine  is  the 
point  against  which  Professor  Fetter  has  directed  a  most  searching  and 
destructive  criticism.  It  would  be  hard  to  separate  from  the  discus- 
sions of  the  present  text  that  which  is  due  directly  to  Professor  Fetter 
and  that  which  belongs  to  the  author.     But,  in  the  main,  so  far  as  the 


2o8  VALUE  AND  DISTRIBUTION 

and  it  is  doubtless  true  also  that,  with  a  given  volume  of 
capital,  the  more  time,  the  more  productivity ;  capital  works 
in  time.  But  this  is  equally  true  of  land,  and  is  the  basis 
of  rent  on  either  land  or  capital.  And  it  is — or  may  be — 
true  that  "production  is  more  or  less  capitalistic  according 
to  the  average  remoteness"  at  which  return  comes  to  pro- 
ductive powers.  But  here  again  the  principle  applies 
equally  to  land  powers,  that  is  to  say,  the  question  is  merely 
one  of  the  importance  of  time  in  getting  results  out  of 
instruments  of  production — no  great  discovery.  The  fact 
seems  to  be  that  the  more  any  good  helps  in  production — 
value-wise,  as  market-determined — the  greater  is  it  in 
volume  as  capital ;  but  the  farther  away  its  product  is  in 
point  of  time  the  less  is  the  present  worth  of  its  product, 
and  thereby  the  less  the  value — the  capital  quantity — of 
the  good  as  capital. 

Capital  is — and  herein  lies  the  chief  point  of  its  productive 
efficiency — an  effective  intermediate  cause  of  the  consummation  of 

this    profitable    roundabout    process I    say    "intermediate 

cause,"  not  "cause."     Capital  gives  no  independent  impulse ;  it  only 

present  discussion  is  not  directly  borrowed  from  Professor  Fetter,  it 
has  been  suggested  by  him. 

At  the  same  time,  it  is  fair  to  say  that  Professor  Clark,  in  the 
controversial  articles  lately  referred  to,  has,  in  essentials,  anticipated 
Professor  Fetter's  criticisms  ;  all  this,  however,  in  the  process  of  intro- 
ducing or  of  supporting  his  regrettable  abstract-capital  concept,  and, 
possibly,  without  entire  appreciation  of  the  full  reach  and  import  of  the 
objections  formulated  by   him   to   the  position   of   Boehm-Bawerk. 

So  far  as  refers  to  Professor  Fetter's  treatment  of  time  value — 
interest  in  the  widely  inclusive  sense  of  the  term — the  doctrine  should, 
perhaps,  be  rather  held  to  be  that  of  Wieser  than  of  Fetter,  though 
here  also  Fetter's  discussion,  in  its  development  of  the  principle  and  in 
its  consciousness  of  the  significance  and  extent  of  the  principle,  is  by 
much  to  be  preferred. 

The  following  is  from  Natural  Value,  p.  141  : 

"Every  capital  value — not  alone  the  value  of  a  sum  of  money  but 
of  every  perishable  productive  instrument — is  calculated  by  discounting 
(compare  Menger,  p.  135)  ;  that  is  to  say,  from  the  value  of  the 
future  expected  sum  of  products  into  which  the  capital  will  be  trans- 
formed, the  corresponding  net  return  is  deducted.  Only  that,  prac- 
tically, in  discounting  money  claims,  a  fixed  rate  of  interest,  i.  e.,  a 
definite  relation  between  capital  value  and  net  return,  is  always 
assumed,  and  always  emerges,  while  we  are  explaining  the  formation 
of  this  relation  by  first  discovering  the  principle  for  estimating  capital 
value." 

No  intention  exists  here  to  credit  Wieser — or  Menger — with  origi- 
nality in  this  regard  ;  I  have  made  no  attempt  to  trace  the  doctrine  back 
to  its  origin  ;  sympathetically  interpreted,  Say,  at  any  rate,  appears  to 
contain  it.      See  p,   116, 


INTEREST  209 

transmits   an  impulse  given  it   by  the   original   productive  povirers, 

just    as     one    billiard    ball     transmits     motion     to     another 

Capital  is  also  the  indirect  cause  of  other  profitable  roundabout 
ways  of  production  being  entered  upon — other,  that  is,  than  those 
in  the  course  of  wliich  it  itself  has  come  into  existence.  When  a 
people  possesses  much  capital  not  only  can  it  successfully  complete 
those  processes  in  the  course  of  which  the  capital  presently  existing 
has    come    into    being,    but    it    can    also    adopt    other    and    new 

methods The  greater   the   stock   of   capital,   the   larger   is 

the  share  taken  by  the  productive  powers  of  the  past  in  providing 
means  of  consumption  for  the  present,  and  the  less  are  the  new 
productive  powers  of  the  present  drawn  on  for  the  present /° 

But  as  ultimate  cause,  certainly,  it  is  only  when  we  con- 
ceive of  subsistence  goods  as  capital  that  it  is  possible  to 
regard  capital  as  in  any  degree  explaining  the  roundabout- 
ness  of  the  industrial  process ;  only  so  far  as  capital  in 
possession  affects  the  aggregate  of  production  may  it  bear 
upon  the  saving  possible  to  take  place.  "In  this  sense  but 
only  in  this  sense,  is  it  possible  to  say  that  man  must 
already  have  capital  before  he  can  enter  on  roundabout 
methods  of  production. "^'^ 

On  something  like  this  ground — it  will  be  remembered 
— was  Jevons  led  to  assert  that  only  subsistence  goods  are 
capital.  But  Boehm-Bawerk  expressly  dissents  from  this 
view ;  he  denies  that  consimiption  goods  are  capital,  even 
denies  that  long-time  consumption  goods,  e.  g.,  a  house 
occupied  by  its  owner,  are  capital,  and  asserts  that  only 
when  there  comes  a  fore-product — an  intermediate  product 
— has  capital  emerged.^^ 

All  this,  then,  makes  him  appear  to  say  that  there  are 
two  distinct  causes  co-operating  to  increase  the  roundabout- 
ness  of  production:  (i)  larger  supplies  of  capital,  and 
(2)  larger  supplies  of  something  not  capital.  His  recon- 
ciliation for  this  apparent  contradiction  would  probably  be 
found  in  the  view  that  these  larger  margins  of  goods  over 
pressing  current  needs  are  relevant  only  to  explain  the 
larger  supplies  of  instrumental  goods — capital  proper — and 
through  them  the  greater  roundaboutness  in  productive 
methods. 

But  precisely  what  does  this  notion  of  roundaboutness 
accurately  mean?     Surely  to  stop  fishing,  in  order  to  make 

"  Boehm-Bawerk,  op.  cit.,  p.  92. 
"  Ibid.,   p.   93. 
^Ibid.,  p.  96. 


2IO  VALUE  AND  DISTRIBUTION 

a  fish  pole  whereby  later  to  catch  more  fish,  is  a  round- 
about method,  since  it  is  the  interposing  of  a  time-consum- 
ing process  of  getting  ready  to  do  the  thing  finally  to  be 
done,  a  submission  to  waiting,  an  abstinence.  But  is  there 
therefore  any  warrant  for  saying  that  when  once  the  fisher- 
man has  his  pole  in  readiness,  he  will  require  with  it  a 
longer  time  than  formerly  in  order  to  catch  his  first  fish, 
and  will  derive  his  benefit  only  through  the  fact  that, 
undergoing  a  longer-time  process,  he  obtains  a  more  than 
proportionally  larger  catch?  Why  not  equally  well  more 
fish  in  the  same  time? 

After  all,  is  there  in  this  fact  of  roundaboutness  any- 
thing more,  necessarily  or  characteristically,  than  a  more- 
ness  of  waiting  as  volume  rather  than  a  moreness  purely  as 
duration?  If  more  capital  goes  into  steam  shovels,  may  it 
not  be  merely  into  more  shovels  of  the  old  type;  or,  if  into 
those  of  a  new  type,  may  these  not  be  simply  more 
elaborate  and  more  expensive  methods  of  doing  the  same 
work  in  fewer  days?  more  breadth  of  waiting  with  less 
length  ? 

But  it  may  evidently  be  true  that  the  larger  capacity  for 
waiting  derived  by  society  from  the  diminishing  pressure 
of  imperative  needs  upon  producing  power,  may  be  turned 
to  the  development  of  methods  demanding  longer  periods 
of  time;  with  the  sacrifice-significance  of  saving  counting 
for  less,  vinegar  and  wine  may  advantageously  be  given 
longer  and  longer  periods  for  the  developing  and  ripening 
of  their  finer  but  less  essential  qualities.  And  so  there  will 
probably  come  many  appliances  demanding  periods  of 
longer  duration,  but  justified,  under  the  new  conditions  of 
waiting-burden,  by  the  extra  results  achieved.  But  it  is 
hardly  to  be  believed  that  all  new  savings  will  go  into  this 
longer-time  direction  of  change.  But  even  of  those  that  do 
so  go,  not  all  will  go  into  instrumental  goods  of  the  tech- 
nological sort ;  on  the  contrary  some  of  the  new  power  will 
go  into  better-constructed  and  more  durable  houses,  long- 
time provision  against  future  needs  rationally  and  advan- 
tageously provided  in  the  present  time — that  is.  into  future 
goods  subject  to  the  discount  process  into  present  worth — 
future  income  rendered  over  into  a  present  value  reckon- 
ing— that  is,  the  emergence  of  capital  and  interest,  with  all 
the  materials  of  the  capitalization  process,  but  with  only 
consumption  goods  in  question.  And  other  savings  will  be 
going  both  into  durable  and  into  temporary  improvements 


INTEREST  211 

upon  the  land ;  and  meanwhile,  under  the  lower  stress  of 
present  need,  the  original  powers  of  the  soil  are  coming 
to  be  better  husbanded,  their  destruction  or  impairment 
avoided,  their  profitable  future  results  waited  for.  Absti- 
nence is  a  land  fact  as  well  as  a  non-land  fact. 

But  this  is  not,  for  present  purposes,  the  only  point  of 
identity  between  consumption  goods — consumable  goods — 
and  instrumental  goods,  or  between  non-land  instruments 
and  land  instruments.  Concurrently  with  Boehm-Bawerk's 
insistence  that,  as  a  question  of  origin,  capital  is  not  an 
independent  element  of  production,  in  this  respect,  there- 
fore, differing  from  land,  he  finds  it  also  to  his  purpose  to 
refute  the  ancient  doctrine  that  capital  is  merely  stored-up 
labor,  and  asserts  of  capital,  as  regarded  from  the  produc- 
tive-efficiency point  of  view :  "Capital  ....  is  stored 
up  labor,  but  it  is  something  more ;  it  is  stored  up  valuable 
natural  power."     [Italics  are  the  present  writer's.]  ^^ 

But  not  only  does  this  abandon  the  distinction  of 
origin  between  land  and  capital,  but  it  also  forsakes  the 
concrete-capital  notion  for  the  value  concept ;  it  conceives 
of  capital  as  an  intermediate  fact  through  which  the  two 
original  facts — man  and  environment — exert  their  instru- 
mentality ;  and  thus  capital  now  appears  as  something 
which  is  not  land,  but  yet  is  stored-up  land  product  in  its 
price-value  expression. 

In  the  chapter  next  following  there  appears  to  be  also 
express  recognition  of  non-instrumental  forms  of  capital — 
the  loan- fund  form — or  what  may  conceivably  be  classed 
as  the  abstract-capital  form : 

This  encroaching  on  the  moment's  enjoyment  need  by  no  means 
involve  downright  privation.  With  more  productive  labor,  Cru- 
soe's choice  might  not  He  ...  .  between  bare  living  and  com- 
fortable   living,    but,    perhaps,    be'tween    comfortable    and    ample 

living The  essential  thing  is  that  the  current  endowment 

of  productive  powers  should  not  be  entirely  claimed  for  the 
immediate  consumption  of  the  current  period,  but  that  a  portion  of 
this    endowment    should    be    retained    for    the    consumption    of    a 

future  period A  saving  of  productive  pozvers,  be  it  noted; 

for  productive  powers,  and  not  the  goods  that  constitute  capital, 
are  the  immediate  objects  of  saving.  This  is  an  important  point, 
which  must  be  strongly  emphasized  because,  in  the  current  view, 
too    little    consideration    is    given    to    it.      Man    saves    consumption 

"  Boehm-Bawerk,    op.   cit.,   p,   99. 


212  VALUE  AND  DISTRIBUTION 

goods,  his  means  of  enjoyment;  he  thus  saves  productive  powers, 
and  with  these  finally  he  can  produce  capital The  immedi- 
ate cause  of  the  production  of  capital  is  production;   the  mediate 

cause  is  saving It  is  only  exceptionally  that  capital  itself 

is  the  immediate  object  of  saving;  it  may  happen  in  the  case  of 
those  goods  which,  by  nature,  admit  of  being  used  either  for  pro- 
duction or  for  consumption,  such  as  grain.  To  the  extent  that  a 
man  withdraws  such  goods  from  immediate  use  in  consumption, 
his  saving  directly  lays  the  foundation  of  capital."" 

But  whether  all  this  can  be  strained  to  bear  the  loan- 
fund  or  abstract-capital  interpretation,  may  perhaps  be  best 
decided  by  Boehm-Bawerk's  analysis  of  the  methods  by 
which  savings  work  out  into  the  existence  of  concrete 
instrumental  goods.  Here,  manifestly,  the  process  is 
entirely  misconceived ;  it  is  not  true  that 

if  the  owner  lend  his  wealth  to  others  ....  for  consump- 
tion ....  the  sum  lent  is  a  direct  advance  of  subsistence  to  the 
borrower ;  ....  if  for  production  ....  it  passes,  as  already 
described,  from  the  borrowing  employer  to  the  laborers,  as  advance 
of  subsistence.  Thus  the  entire  accumulated  wealth  of  society — 
with  the  very  trifling  exception  of  that  portion  which  the  owners 
themselves  consume — is  really  brought  into  the  market  as  supply, 
of  advances  of  subsistence.^' 

The  bearing  of  the  mere  fact  of  perspective  upon  the 
interest  rate  is  admitted  and  indeed  asserted  by  Boehm- 
Bawerk : 

There  are  three  factors,  each  of  which,  independently  of  the 
other,  is  adequate  to  account  for  a  difference  between  present  and 
future  goods  in  favor  of  the  former.  These  three  factors  are : 
The  difference  in  the  circumstances  of  provision  between  the  present 
and  the  future;  the  underestimate,  due  to  perspective,  of  future 
advantages  and  future  goods ;  and  finally,  the  greater  f ruitfulness 
of  lengthy  methods  of  production. 

The  needy  and  careless  value  present  goods  more  highly 
because  they  urgently  require  them  in  the  present  or  think  only 
about  the  present ;  the  well  off  and  the  saving  value  them  because 
they  can  accomplish  more  with  them  in  the  future.  And  thus,  in 
the  long  run,  everyone,  whatever  his  economic  position  and  what- 
ever his  economic  temperament,  has  some  ground  for  valuing 
present  goods  more  highly  than  future.^^ 

^^  Boehm-Bawerk,  op.  cit.,  pp.   102,    103. 
"  Ibid.,  p.  321. 
'^'^  Ibid.,  p.  2y7. 


INTEREST  213 

There  is,  indeed,  no  writer  to  deny  the  influence  of  per- 
spective, although  Wieser  appears  to  criticize  the  rational 
justification  for  the  influence,^^  and  is  not  entirely  definite 
as  to  its  independent  sufficiency  for  the  emergence  of  an 
interest  rate. 

Fetter  apparently  ascribes  the  interest  phenomenon 
entirely  to  perspective,  allowing  to  productivity  only  such 
influence  as  it  indirectly  exercises  through  the  effect  upon 
the  supply  of  goods  with  which  the  perspective  principle 
concerns  itself.^* 

Carver,  insisting  that  were  there  no  indisposition  to 
save,  no  abstinence  cost  for  capital,  there  could  be  no  limi- 
tation upon  the  supply  of  capital — a  pain-cost  doctrine  for 
the  aggregate  capital  supply,  with  the  implication  that  the 
cost  margin  is  found  at  the  highest  point  of  saving-pain, — 
finds  the  demand  to  be  made  up  of  requirements  partly  for 
technological  purposes  and  partly  for  consumption ;  the 
point  of  adjustment  between  the  supply  and  the  demand  is 


^  "At  bottom  the  economic  conflict  between  the  needs  of  today 
and  those  of  tomorrow  is  really  of  a  moral  nature ;  it  is  a  special 
case  of  the  struggle  between  impulse  and  reason." — Wieser,  op.  cit.,  p.  17, 

"Present  and  future  wants  coming  into  competition  with  each 
other,  are  as  a  rule  to  be  regarded  as  equal ;  that  is  to  say,  the  differ- 
ence in  time  does  not  necessitate  any  difference  in  valuation.  To  this 
proposition  we  have  now  to  add  a  second  :  that  within  the  sphere  of 
production  the  difference  in  time  does  necessitate  a  difference  in  valua- 
tion  of  the   goods   employed   in   production.      The   two    propositions   are 

in    perfect    accord    and    mutually    supplement    one    another If 

capital  ....  is  able  to  yield  continuously  the  same  returns,  this 
must  find  expression  in  a  valuation  which  ascribes  to  capital  a  higher 
value,  the  earlier  the  point  of  time  it  comes  into  our  possession.  For 
the  earlier  the  point  of  time,  the  earlier,  and  consequently  the  greater, 
the  return  that  may  be  expected." — Wieser,  op.  cit.,  p.    143. 

"*  I  confess  my  inability  to  justify,  by  direct  quotation  or  by  strict 
logical  necessity,  this  interpretation.  It  seems  to  me,  however,  to  be 
necessitated  by  the  general  trend  and  direction  both  of  Professor 
Fetter's  critical  and  of  his  constructive  work.  At  any  rate,  I  am 
totally  unable,  otherwise  than  upon  this  interpretation,  to  make  out 
the  relation  posited  by  him  between  technological  productivity  and  time 
discount. 


214  VALUE  AND  DISTRIBUTION 

the  interest  rate :  "^  all  of  which  Boehm-Bawerk  would 
accept,  with  some  mild  protest  about  the  word  abstinence, 
and  with  much  relative  insistence  and  emphasis  upon 
demand  or  utility,  and  finally  with  a  peremptory  call  that 
the  value-surplus  fact  get  somehow  out  of  all  this  a  definite 
explanation.  And  in  this  call  the  economic  world  will  join, 
at  the  same  time,  however,  probably  denying  that  Boehm- 
Bawerk  has  himself  performed  the  task,  as  set  forth  by 
him  m  the  following : 

The  statement  of  how  productivity  of  capital  works  into  and 
together  with  the  other  two  grounds  of  the  higher  estimation  of 
present  goods,  I  consider  one  of  the  most  difficult  problems  of  the 
theory  of  interest  and  at  the  same  time  the  one  which  must  decide 
the  fate  of  that  theory."' 

In  view  of  all  this  explicit  recognition  of  perspective,  it 
only  remains,  for  purposes  of  review  and  of  criticism,  to 
set  forth,  without  extended  comment,  the  surprising  doc- 
trines both  of  Boehm-Bawerk  and  of  Wieser  in  respect 
to  land  rentals,  and,  less  distinctly  enunciated,  the  logically 
associated  doctrines  for  consumption  loans. 

In  a  certain  sense  interest  on  production  and  interest  on  con- 
sumption have  a  common  source.  Both  of  them  relate  to  a  differ- 
ence in  the  valuation  of  present  and  of  future  goods,  only  that  the 
causes  which  produce  this  difference  are  distinct.     (Wieser,  op.  cit., 

P-  155- ) 

If  they  [houses]  are  to  be  produced,  there  must  be  the  prospect 
that  their  value  will  include  the  full  and  permanent  maintenance 
of  the  undertaker's  capital,  whether  this  value  be  realized  through 

selling  or  through  letting  the  property The  interest  of  hire 

or  let  must,  therefore,  stand  at  the  usual  amount  of  interest  on 
capital.  It  is  an  application  of  the  law  of  costs,  according  to  which 
the  customary  interest  on  capital  is  reckoned  among  costs.  (Wieser, 
op.  cit.,  p.   157.) 

The  value  of  land  is  calculated  ....  by  capitalizing  the  rent 

of  land In  order  to  capitalize,  a  given  rate  of  interest  is 

necessary ;  and  that  an  interest  rate  may  be  given,  we  need  capi- 
tal  Land  has  not  the  same  double  function  as  productive 

"'  "The  Place  of  Abstinence  in  the  Theory  of  Interest,"  Qiiar.  Jour, 
of  Econ.,  October,   1893. 

^Positive  Theory,  p.  2^7,   note. 


INTEREST  215 

factor  and  as  product.  It  produces  without  being  produced;  and 
thus,  to  determine  the  value  of  land,  it  becomes  necessary  to  bring 
to  our  aid  the  standard  of  capitalization  which  we  find  in  capital. 
(Wieser,  op.  cit.,  pp.   158,  159.) 

This  implies  either  that  abstinence  is  not  sufficient  as  the 
basis  of  an  interest  rate,  or  that  the  individual  owner  of 
land  exercises  no  abstinence  with  regard  to  it,  or  that,  in 
general,  there  is  no  interest  possible  excepting  by  deriva- 
tion from  technological  non-land  productivity  together  with 
some  sort  of  distributive  imputation. 

That  interest  is  possible  independently  of  technological 
productivity  would  seem  to  be  inferable  from  Boehm- 
Bawerk's  assertion  of  the  threefold  basis;  if  so,  however, 
this  must  mean  that  interest  is  not  a  phenomenon  appear- 
ing exclusively  in  connection  with  capital,  but,  on  the  con- 
trary, may  attach  to  something  which  is  not  capital.  And 
yet,  on  page  49  of  the  Positive  Theory,  in  discussing  Knies's 
concept  of  capital,  with  especial  reference  to  interest  on 
money  loans,  it  is  said ; 

Does  the  interest-bearing  money  belong  to  capital,  or  does  it 
not?  ....  If  we  answer  in  the  negative  ....  we  commit  our- 
selves to  the  strange  doctrine  that  a  thing  which  undoubtedly  bears 
interest  is  not  capital. 

It  is,  however,  in  a  later  chapter  said  that  interest  may 
be  paid  for  the  use  of  land ;  that  land  is  to  be  regarded 
as  a  productive  instrument  equally  with  capital ;  like  capi- 
tal, it  manifests  its  productivity  in  time,  and  also  somehow, 
by  virtue  of  its  concrete  productivity,  furnishes,  like  capi- 
tal, the  basis  of  value  productivity. 

The  theoretical  explanation  of  rent  from  land  coincides  ulti- 
mately with  the  explanation  of  interest  obtained  from  durable 
concrete   capital,   and   land    rent    is   nothing  but   a    special   case   of 

interest  obtained  from  durable  goods Manifestly  the   fact 

that  rent  of  land  and  rent  of  capital  have  one  common  final  cause 
is  not  a  sufficient  reason  for  abolishing  every  distinction  between 
them.  Between  land  and  capital  there  are  so  many  important  dif- 
ferences, both  theoretical  and  practical,  that,  notwithstanding  the 
common  feature  just  described,  we  are  justified  in  adhering  to  the 
decision  made  in  a  former  chapter  to  keep  land  out  of  the  concep- 
tion of  capital.^ 

^Positive  Theory,  pp.  355-57. 

It  may  be  worth  while,  for  purposes  of  a  convenient  summary, 
to  reproduce  Boehm-Bawerk's  own  synopsis  of  the  reasons  referred  to 


2i6  VALUE  AND  DISTRIBUTION 

That  the  services  from  any  durable  consumption  good, 
a  house,  for  example,  are  mainly  future  services,  and  are 
thereby  subject  to  a  discount  into  present  worth  as  the 
capitalized  value  of  the  house,  is  fully  and  clearly  asserted 
by  Boehm-Bawerk ;  but  here  again  the  concept  of  capital  is 
not  widened  to  include  goods  of  this  sort;  they  are  regarded 
as  mere  long-time  consumption  goods  and  not  capital,  on 
the  ground  that  they  are  not  "intermediate  products,  des- 
tined to  serve  toward  further  production."  But  none  the 
less  is  it  said : 

Our  theory  traces  back  the  profits  which  durable  goods  yield 
their   owner   to   the   selfsame   causes   as   explain   interest   on   loans 

and  undertaker's  profit  on  production Supposing  that  the 

other  kinds  of  interest  could  be  explained  by  the  productivity  of 
capital,  obviously  this  was  no  explanation  of  the  interest  yielded  by 
a  durable  consumption  good  which  produced  nothing,  such  as 
a   dwelling-house,    household    furniture,    a    hired    piano,    the    books 

of  a  lending  library The  true  primary   fact  is  the  lower 

value  of  future  goods  and  future  services.^* 

in  support  of  the  distinction  under  consideration.  The  bracketed  inter- 
polations must  be  pardoned  in  the  interests  of  space. 

"In  many  essential  respects  land  and  capital  take  different  ways : 
(i)  The  former  is  immovable;  the  latter,  for  the  most  part,  movable 
[irrelevant]  ;  (2)  the  former  is  a  gift  of  nature  ;  the  latter  a  result  of 
labor  [Neither  side  of  the  antithesis  is  always  true ;  and  Boehm- 
Bawerk  has  himself  admitted  as  much  for  the  latter  statement.]  ; 
(3)  the  former  cannot  be  increased;  the  latter  can  be  [untrue]  ;  (4)  the 
landowner  has  a  social  and  economic  position  essentially  different 
from  that  of  the  capitalist ;  property  in  land  is  justified  on  essentially 
different  grounds  from  property  in  movables  [ethics,  law,  or  politics — 
at  all  events  not  economics]  ;  (5)  land  is  the  special  object  of  a  kind  of 
production  which  is  economically  distinguished  by  many  important 
peculiarities  [Technology?  At  any  rate,  diminishing  returns  are  not 
peculiar  to  land.]  ;  (6)  income  from  land,  while  subject  to  many  laws  in 
common  with  income  from  capital,  obeys  many  distinct  laws  of  its 
own — land  rent,  for  instance,  rising  with  economical  development, 
while  interest  falls."  [As  Boehm-Bawerk  has  just  shown,  capital  rent 
and  land  rent  capitalize  under  precisely  the  same  rate ;  and  many 
forces  in  economic  development  bear  to  diminish  rent,] — Positive 
Theory,  p.  55. 

'^  Ibid.,  pp.  346-49. 


CHAPTER  XV 

INTEREST    (concluded) 

To  discuss  economic  problems  in  terms  of  price  rather 
than  of  value,  to  place  the  emphasis  upon  money  rather 
than  upon  the  things  that  money  will  buy,  to  talk  of  nomi- 
nal rather  than  of  real  wages,  is  commonly  accepted  as  the 
mark  of  superficial  thinking;  that  price  is  a  mere  half-way 
house  between  value  and  value  or  between  utility  and 
utility  has  come  to  mean  that  it  is  for  most  theoretical  pur- 
poses no  house  at  all. 

It  is  nevertheless  important  to  appreciate  how  much  of 
modern  economic  life  woud  be  different,  and  how  much 
of  economic  theory  would  require  reformulation,  were 
there  no  money  and  no  money  price.  The  problem  reaches 
even  so  far,  indeed,  as  to  have  raised  the  question  whether, 
without  a  money  denominator,  the  value  problem  would 
be  possible  of  solution.  What  would  be  the  theoretical 
situation  were  there  no  conventional  standard  and  medium? 

It  is  at  any  rate  evident  that,  at  no  matter  what  incon- 
venience, there  would  be  barter  enough  in  this  money- 
less society;  division  and  specialization  of  employment 
would  obtain  very  much  as  under  present  conditions ; 
recognized  value  relations  would  establish  themselves 
between  such  classes  of  goods  as  in  considerable  measure 
were  exchanged  against  each  other,  and  under  some  sort  of 
arbitrage  these  relations  would  acquire  a  considerable 
degree  of  definiteness.  That  is  to  say,  value  relations 
would  exist  essentially  as  at  present,  but  all  this  without 
any  price  system.  But  would  there  exist  no  medium  of 
exchange?  No.  Or,  rather,  there  would  be  not  one 
medium  but  an  indefinite  number  of  media;  for  by  trading 
and  retrading,  possessors  of  commodities  for  exchange 
would  finally  place  themselves  in  command  of  commodities 
exchangeable  against  the  particular  commodities   desired; 

217 


2i8  VALUE  AND  DISTRIBUTION 

this,  indeed,  would  be  the  method  of  arbitrage  by  which  a 
fairly  complete  system  of  value  relations  would  get  itself 
established.  That  is  to  say,  each  man  would,  as  his  neces- 
sities should  dictate,  be  employing  a  medium  of  exchange, 
an  intermediate  between  his  wares  for  sale  and  the  con- 
sumption goods  desired  by  him,  but  this  intermediate  would 
be,  for  different  men,  and  for  each  man  at  different  times, 
a  dift"erent  medium. 

A  money  economy  exists  only  when  one  intermediate 
of  exchange  and  medium  of  value  expression  is  conven- 
tionally established. 

So  far,  however,  no  great  issues  appear  to  depend  upon 
the  presence  of  ?•  money-price  system.  But  how  about 
deferred  payments,  and  speculative  or  long-time  merchan- 
dising, and  all  the  ramifications  of  the  system  of  credit? 

Whatever  may  be  the  fact  with  regard  to  subjective 
value — of  which  more  later — it  must  be  true  that  market 
value  can  be  expressed  only  in  terms  of  something  else;  but 
expressed,  be  it  noted,  and  not  measured,  and  expressed 
only  in  the  sense  of  the  equivalency  implied  in  the  mere 
fact  of  exchange. 

Not  merely  so,  but  value  can  never  be  expressed  in 
terms  of  more  than  one  thing  at  a  time — any  more  than  the 
height  of  any  particular  man  can  be  expressed  as  the 
height  of  a  dozen  different  men  at  once.  The  market  value 
of  any  one  thing  is,  then,  expressible  as  a  ratio  of  exchange 
with  reference  to  any  one  of  all  the  different  things  against 
which  the  commodity  in  question  is  actually  exchanged. 

In  German  usage,  Preis  is  the  generic  term  for  the  good 
on  either  side  of  an  exchange,  in  its  function  of  quid  pro  quo- 
If  the  exchange  relation  is  one  of  goods  against  the  money 
good,  the  money  is  called  the  Gcld-Prcis.  In  English  usage — 
as  goes  without  saying — price  has  been  limited  to  mean  ex- 
change power  expressed  in  terms  of  money  solely.  Thus, 
while  on  the  whole  the  German  usage  may  well  appear  to  be 
the  more  philosophical,  it  must  remain  true  that  popularly 
price  means  the  money  that  a  thing  will  sell  for,  and  that 


INTEREST  219 

some  term  for  this  money  relation,  this  expression  of 
exchange  power  in  terms  of  a  conventionally  specialized 
money  commodity,  is  imperatively  called  for. 

But  in  relations  of  exchange  over  considerable  intervals 
of  time  or  of  space,  the  case  no  longer  presents  itself  as  one 
of  terminology  but  rather  as  one  of  controlling  business 
necessity.  Here  the  only  feasible  qiiid  pro  quo  is  the  money 
intermediate ;  no  other  price  than  money  price  has  practical 
standing  in  the  problem ;  price  and  money  price  are  one. 

What,  indeed,  would  be  the  deferred-payment  situation 
in  the  absence  of  any  conventional  standard  in  which  the 
deferred-payment  relation  might  be  expressed?  The 
farmer  would  hardly  contract  to  accept  a  hay  payment  as 
against  his  present  advances  of  hay,  nor  much  more  prob- 
ably, any  variety  of  grain ;  later,  as  well  as  now,  he  is  likely 
to  have  these  in  surplus.  There  would  be  nothing  for  it 
but  to  sell  against  the  promise  of  whatever  com- 
modity should  seem  most  likely  to  be  the  commodity 
desired  at  the  expiration  of  the  payment  term,  or  to  arrange 
to  receive  that  commodity  seemingly  most  likely  to  be  read- 
ily marketable  as  an  intermediate.  That  is  to  say,  here 
again  the  result  would  be  not  the  absence  of  an  inter- 
mediate, but  the  multiplication  of  intermediates,  and  each  of 
these  would  serve,  for  the  respective  individual  interested, 
merely  as  a  fund  of  general  purchasing  power,  but  of  a 
most  regrettably  speculative  quality. 

All  of  which  sums  up,  as  we  have  already  seen,  in  saying 
that  so-called  value  relations  over  interval  of  time  are 
really  nothing  but  utility  relations  worked  out  in  terms  of 
price,  and  that  these  relations  are  practicably  incapable  of 
any  other  manner  of  working  out.  Try  to  interpret  the 
assertion  that  100  of  today  is  worth  105  of  next  year;  it 
will  be  found  to  mean,  (i)  that  100  articles  of  today 
exchange  today  against  the  promise  of  105  articles  of 
similar  kind — an  exchange  relation  worked  out  in  terms  of 
the  present  value  system — a  relation  in  which  either  side  of 
the  exchange  is  the  price  expression  of  the  other,  without 


220  VALUE  AND  DISTRIBUTION 

the  employment  of  any  money-price  mechanism;  or  (2) 
that  either  side  of  the  exchange  relation  commands  as  much 
money  now  as  does  the  other  now — a  price  relation  of  the 
money  sort;  or  (3)  that,  because  of  the  actually  ruling  dis- 
count rate,  105  of  promised  money  exchanges  against  loo 
of  present  money.  But  what  would  it  mean  to  say  that  the 
105  of  the  later  time  will  then  have  the  same  value  that  the 
100  has  now?  The  100  of  today — 100  hats  or  100  dollars — 
is  an  item  in  a  present  exchange  system,  a  present  scheme 
of  value  relations ;  the  105  belongs  to  another  and  a  distinct 
system.  The  only  value  link  between  the  two  systems  is 
this  of  exchange  relations  established  between  two  quanti- 
ties of  something  chosen  as  standard  for  the  purpose  of  the 
deferred-payment  relation.  And  in  this  standard  of 
deferred  payment  all  notion  of  equality  in  value  under 
some  value-measure  system  is  lacking.  The  situation  is 
simply  this :  By  virtue  of  the  fact  that  the  selected  inter- 
mediate is  one  of  wide  acceptability,  and  offers,  as  is 
thought,  the  closest  possible  approximation  to  general 
purchasing  power — something  approaching  an  equality  in 
utility,  in  service,  is  possible;  and  this  is  all  that  is  possible. 

But  the  money  medium  is  not  adapted  to  measure  the 
service;  and  it  being  true  that  utility  relations  in  exchange 
are  purely  personal  categories  always,  it  must  follow  that 
if  any  commodity  exchanged  finds  anywhere  a  measure  of 
utility,  that  measure  will  have  to  be  the  quid  pro  quo  of  each 
respective  act  of  exchange.  But  the  fact  is  that  to  neither 
of  the  traders  can  the  exchanged  commodities  be  in  equi- 
librium of  utility,  else  the  exchange  would  not  have  taken 
place.  The  fact  of  exchange  does  not,  then,  anywhere 
attest  equality  of  utility,  but  only  equality  of  value  in  the 
sense  of  actual  exchangeability. 

And  all  this  is  merely  a  repetition  of  the  doctrine  that 
the  interest  problem  is  one  of  price  and  of  discount  reck- 
oned upon  price,  and  that  all  value  productivity,  so  called,  is 
really  productivity  indicated  and  proved  and  expressed 
by  increase  in  price ;  gains  are  not  value  gains  in  any  other 


INTEREST  221 

sense  than  that  they  are  utility  gains  worked  out  in  terms 
of  price. 

Savings  and  capital  creation. — It  was  pointed  out  upon 
an  earher  page  that  the  collectivist  concept  of  capital  would 
include  all  technologically  completed  goods  deferred  in 
consumption,  but  would  in  the  main  have  reference  to 
instrumental  goods,  and  this  without  occasion  for  any  dis- 
tinction between  land  and  other  productive  instruments. 
Rights  and  credit  claims  of  various  orders  could  have  no 
place ;  saving,  that  is  to  say,  would  embody  itself  in  con- 
crete material  forms ;  loan- fund  capital  could  interpose  no 
intermediate  stages  between  saving  and  social  capitaliza- 
tion, and  no  possible  justification  could  exist  for  the  emer- 
gence of  any  abstract-capital  concept. 

It  was,  however,  urged  that  social  saving  would  have 
this  much  in  common  with  competitive  saving,  that,  under 
either  system,  saving  must  imply  postponed  consumption; 
private  saving,  privately  postponed  consumption ;  social 
saving,  a  social  postponement,  either  directly  in  the  saving 
of  consumption  goods,  or  indirectly  by  the  diverting  of 
productive  energies  from  product  ends  to  instrument 
means. 

But  at  what  point,  in  a  collectivist  society,  would  saving 
and  capitalization  rationally  find  their  limit?  Surely  only 
such  surplus  as  should  exist  over  imperative  present  need 
could  go  to  capitalization ;  but  what  would  be  the  farther 
limit  ? 

As  long  as  a  later  utility  of  larger  volume  was  to  be  had 
through  the  postponement  of  a  present  service,  so  long 
saving  would  be  a  rational  process.  In  this  computation, 
different  individuals  would  have  to  count  at  an  equality, 
and  future  members  of  society  and  present  members  of 
society  be  indifferently  regarded. 

But  there  would  still  be  limitations  to  be  recognized 
upon  the  postponement  policy.  The  substitution  of  instru- 
mental goods  for  labor  is, as  we  have  seen, a  limited  process; 


S22  VALUE  AND  DISTRIBUTION 

the  point  somewhere  arrives  where  the  indirect  capitahstic 
method  gives  no  greater  product  than  does  the 
direct  labor  method.  Precisely  where  this  point  falls  is  in 
large  part  a  question  of  the  development  of  industrial  tech- 
nique. After  the  uncivilized  man  has  provided  himself 
with  one  or  two  boats  and  a  fair  supply  of  poles  and  lines, 
he  will  do  ill  to  increase  his  supply  in  these  directions. 
So  for  the  more  skilled  workman  there  is  a  limit  to  the 
number  of  shovels,  plows,  reapers,  or  looms  that  he  can 
adequately  use  or  tend.  So  also  the  point  of  capital  satura- 
tion is,  in  any  society,  in  considerable  measure  a  question  of 
the  standard  of  comfort,  and  of  the  development  of  varied 
directions  of  consumption ;  but  in  any  given  situation  there 
is  a  limit  point.  Again,  while,  in  a  coUectivist  society,  haz- 
ards of  criminal  predation  w^ould  be  inconsiderable,  other 
hazards  of  loss  with  passing  time  would  need  to  be  con- 
sidered— dangers  of  fire,  and  of  water,  and  of  wind,  and  of 
decay.  In  an  environment  earth-shaking,  like  that  of  Japan, 
the  same  rational  preference  as  with  the  Japanese  would 
exist  for  one-storied  unsubstantial  architecture.  And 
finally,  the  law  of  diminishing  utility  with  expanding  sup- 
ply would  have  its  application  ;  and  all  the  while  the  com- 
parison of  the  present  with  the  future  would  proceed 
neither  in  terms  of  value  nor  of  concrete  product,  but  of 
units  or  totals  of  service. 

Sufficiently  modified,  similar  limitations  hold  for  the 
isolated  individual  economy.  But  here,  there  enter  con- 
siderations of  the  uncertainty  of  life,  and  of  needs  chan- 
ging in  intensity  and  in  direction  with  advancing  age.  So 
the  appeal  of  different  desires  and  the  recognition  of  the 
need  for  saving  are  greatly  modified  accordingly  as  there 
are  or  are  not  parents,  wife,  and  offspring  to  be  taken  into 
the  reckoning. 

Carried  over  into  a  competitive  society,  the  necessary 
modifications  are  more  profound  and  more  far  reaching. 
Subjective  changes  in  need  are  more  pronounced  with  a 
more  complex  life;  the  objective  hazards  of  property-own- 


INTEREST  223 

ing  become  in  some  directions  greater,  in  other  directions 
less.  And  more  importantly  still,  much  saving  takes  place 
for  individual  purposes  which  may  not  at  all  infer  a  social 
saving,  and  which  may  imply  merely  a  deferred  right  of 
consumption  out  of  another's  mortgaged  production,  or 
may  be  even  a  right  of  privilege,  monopoly,  tribute,  or 
pension  at  the  charge  of  one's  neighbors. 

Thus,  how  much  the  individual  may  rationally  save,  and 
the  form  in  which  individual  saving  may  rationally  take 
place,  have  little  or  no  reference  to  the  social  advantage  or 
interest.  And  the  hazards  of  non-employment,  and  the 
hazards  either  of  untimely  death  or  of  death  too  long 
delayed,  require  a  measure  of  saving  which  may  well  in  the 
average  far  outrun  the  average  actual  need  for  rainy-day 
purposes.^  Here  enter  all  sorts  of  considerations  of  fam- 
ily pride,  and  of  interest  in  the  family  prestige  of  com- 
petitively ostentatious  establishments. 

How  far  may  saving  extend  in  a  competitive  society, 
and  what  shall  be,  in  the  social  interest,  its  theoretical  limit? 

H  any  reply  is  possible,  it  cannot  be  given  now  (see  p.  529, 
note).  For  present  purposes,  we  need  merely  to  examine 
the  actual  functioning  of  abstinence  under  competitive  con- 
ditions. Is  it  possible  here,  as  in  a  collective  or  a  Crusoe 
economy,  that  saving  may  so  far  saturate  the  demand  as  to 
cancel  the  interest  agio?  or  as  even  to  involve  a  negative 
interest — a  charge  for  safe  keeping?  As  not  rarely  one 
pays  to  have  his  traveling-bag  guarded,  so,  under  condi- 
tions of  undeveloped  industrial  technique,  and  of  public 
disorder  and  turbulence,  it  is  within  possibility,  as  earlier 
centuries  proved,  that  negative  interest  be  sometimes 
collected. 

n,  to  the  conditions  already  assumed,  it  be  added  that 
no  money  system  exists,  or  that  the  money  supply  is  so 
small,  in  volume  and  in  employment,  as  to  make  impos- 

^  There  is  something  here  of  bearing  upon  the  question  of  state 
insurance  and  the  possibly  associated  problem  of  oversaving ;  but  there 
is  at  present  neither  time  nor  space  for  the  discussion. 


224  VALUE  AND  DISTRIBUTION 

sible  or  impracticable  any  considerable  saving  through  its 
mediation,  it  might  readily  fall  out  that  the  investment 
supply  would  be  large  enough  to  swamp  the  aggregate 
borrowing  demand  for  consumption  purposes  or  for  indus- 
trial or  trading  purposes. 

Nor,  be  it  noted,  does  this  reasoning  assume  the  can- 
cellation of  all  abstinence  protest  or  cost;  it  assumes  simply 
that  so  intense  is  the  appreciation  of  probable  or  possible 
future  needs,  or  so  great  the  utility  increment  due  to  purely 
subjective  considerations,  as  to  overbalance  the  actual  and 
the  rational  indisposition  toward  waiting. 

But  whether  the  protest  against  waiting  would  be  a 
rational  one,  were  the  uncertainties  of  life  and  of  invest- 
ment not  constant  factors  in  the  problem,  is  not  at  all  clear. 
And  whether  generally  among  men  the  emphasis  is  not  at 
present  too  much  upon  the  possibility  of  old-age  penury 
and  suffering,  and  too  little  upon  the  fact  that  youth  is  the 
period  when  pleasures  are  vivid  and  wealth  is  rich  with 
service,  moralists  rather  than  economists  may  profitably 
discuss;  and  whether,  on  the  whole,  too  great — or  too  little 
— thought  is,  vmder  present  conditions,  devoted  to  making 
provision  for  the  needs  of  v.dfe  and  children,  and  for  the 
pride  and  power  of  future  generations,  may  also  be  of 
interest  to  some  one  other  than  the  economist.  But  it  is 
here  sufficient  to  note  that  an  affirmative  advantage  must 
ever3where  make  goods  its  case  against  the  fundamental 
preference  for  immediate  enjoyment,  else  there  can  be  no 
postponement  of  consumption;  and  changes  of  human 
disposition  in  this  direction  may  greatly  vary  the  relation 
between  the  demand  for  capital  and  its  supply.  Techno- 
logical productivity  does  not,  then,  for  all  possible  condi- 
tions, guarantee  an  interest  agio.^ 

^  This  fact  of  psychological  perspective,  while  accepted  as  an 
opaque  definitive  datum  of  human  nature — a  brute  fact,  if  one  may  be 
allowed  the  term  in  this  connection — has  had  its  rationality  put  much 
in  question.  Why  should  not  the  enjoyment  of  next  year  appeal  to  the 
rational  mind  as  strongly  as  the  enjoyment  of  today?  If  it  be  human 
frailty    that    it    does    not,    and    it    is    yet    the    fact    that    it    does    not, 


INTEREST  225 

Whether  Crusoe  should  hold  a  particular  item  of  goods 
over  from  the  present  to  the  future  would  depend  on 
whether,  in  the  present  reckoning,  the  future  gratification  out- 
economics  will  have  to  get  along  somehow  with  the  situation,  but  may 
at  the  same  time  recognize  the  irrationality  of  it.  In  this  connection 
Wieser  has  already  been  quoted  (p.  213)  Pantaleoni  also,  in  dis- 
cussing whether  remoteness  has  to  do  with  the  present  subjective  value 
of  goods,  otherwise  than  by  virtue  of  the  aspect  of  uncertainty,  says  : 
"A  remote  pleasure  or  pain,  if  supposed  to  be  absolutely  certain,  must, 
other  conditions  being  equal,  be  of  equal  weight  with  a  proximate 
pleasure  or  pain"  (Pure  Economics,  Macmillan,  1898,  p.  26).  Panta- 
leoni adds  that  valuations  made  inconsistently  with  this  principle  are 
anti-hedonistic  and  anti-economic ;  but  that  the  principle  of  con- 
tingency must  allow  not  only  for  the  uncertainty  of  occurrence  but  also 
for  possible  changes  in  the  individual  in  point  of  susceptibility  to  the 
pain  or  pleasure  in  question;  but  it  is  added:  "In  the  majority  of 
instances,  these  valuations  are  carried  on  with  only  approximate 
correctness.  This  is  tantamount  to  saying  that  error  is  a  principal 
source    of    anti-economic    acts,    and    operates    in    this    sense    on    a   vast 

scale But  this  admission,  although  it  can  and  must  be  made, 

in  order  to  explain  real  phenomena,  consisting  of  human  actions,  can 
never  be  adduced  as  explanatory  of  the  phenomena  of  pure  or  rational 
economics,  i.  e.,  of  what  would  occur  if  all  men  were  perfect 
hedonists."  The  subject  of  pure  economics  approached  in  this  manner 
must  become,   one  would  think,   mostly  a  mere  discipline. 

With  some  seeming  skepticism  as  to  the  rationality  of  the  per- 
spective fact,  Carver  has  nevertheless  treated  abstinence  as  a  cost  fact, 
by  arguing  from  what  would  become  of  the  interest  rate,  if  postponed 
consumption  were  not  felt  as  a  burden — if  there  were  no  indisposition 
to  save.  ("The  Place  of  Abstinence  in  the  Theory  of  Interest,"  Quar. 
Jour,  of  Econ.,  October,  1893.)  And  Sidgwick  has  speculated  upon  the 
effects  upon  the  values  of  productive  instruments,  land,  for  example, 
if  the  interest  rate  should  fall  to  zero — all  to  the  conclusion  that  land 
values  would  be  infinite  (but  I  am  totally  unable  to  find  in  my  copy  of 
Sidgwick  the  discussion  which  I  seem  to  myself  to  remember  very 
clearly).  It  should,  perhaps,  better  have  been  deduced  that,  with 
capital  services  free,  land  and  labor  could  retain  exchange  value  only 
to  the  extent  that  the  principle  of  substitution  should  not  apply — -that 
is,  only  in  those  cases  where  the  functions  of  labor  and  of  land  could 
not  be  fulfilled  by  capital.  The  outcome,  then,  of  disappearing  interest 
should  simply  be  a  great  diminution  in  the  volume  of  unfree — valu- 
able— goods,  with  the  valuation  of  such  as  remained  valuable  arrived  at 
without  the  aid  of  the  discount  principle — that  is  to  say,  with  all  uses 
present  and  future  equally  regarded  as  present  items  in  one  and  the 
same    exchange    system. 

But  however  all  this  may  be — and  it  is  not  altogether  clear — it  is 
at  any  rate  certain  enough  that,  with  abstinence  resistance  to  saving 
entirely  removed,  great  changes,  ranging  from  the  infinite  value  of 
land  and  labor  to  the  vanishing  values  of  either,  might  be  formulated 
as  possible ;  and  pretty  much  anything  else  might  also  take  place, 
since  all  economic  science  would  be  at  an  end.     For  the  assumption  is 


226  VALUE  AND  DISTRIBUTION 

ranked  the  present;  and  if  the  good  in  question  were  one 
of  concrete  productivity,  the  same  question  of  choice 
between  the  present  fact  and  the  objectively  greater  future 

entirely  illegitimate.  RecaUing  that  the  psychology  of  saving  is  simply 
that  of  postponed  service,  it  becomes  evident  that  the  assumption  of 
willingness  indefinitely  to  postpone  consumption  is  tacitly  to  abandon 
needs  and  desires  as  the  bases  of  economic  activity,  to  assume  a  total 
lack  of  demand  for  products,  and  thereby  to  make  production  an 
absurdity,  unless,  indeed,  as  a  play  activity,  like  the  mud-pie  making  of 
children — with  whom  also  there  is  said  to  exist  a  precisely  similar 
disposition    toward    indefinite    postponement    of    consumption. 

This  view  forsakes  the  fundamental  assumptions  of  the  science 
— that  human  desires  are  the  primary  fact  in  economics,  and  that  all 
production  takes  place  as  a  mere  intermediate  toward  consumption ; 
it  is,  in  truth,  a  doctrine  parallel,  in  its  obliviousness  of  the  economic 
center  of  gravity,  to  the  earlier  doctrine  of  unproductive  consumption, 
and  to  the  theoretical  view  which  held  laborers'  subsistence  supplies 
to  be  technological  capital  like  coal,  and  that  regarded  man  as  a 
machine  for  the  end  of  turning  out  product,  and  held  the  maximum  of 
accumulation  to  be  the  economic  end  and  test — a  doctrine  parallel 
in  morals  to  the  insane  exaggeration  of  the  virtue  of  frugality,  and  to 
the  ideal  of  dying  rich  as  standard  of  life  and  measure  of  success, 
a  doctrine  which,  generally  applied,  would  veto  any  advance  in  the 
standard  of  living,  and  which,  as  partially  applied  in  the  lethargy 
and  chilled  demand  of  post-panic  depression,  presents  not  merely  the 
bad  logic  and  paradox  but  the  prolonged  miseries  and  disasters  of 
underconsumption. 

The  science  of  economics  is  free  of  the  burden  either  of  justifying 
the  ways  of  God  before  men  or  the  ways  of  men  before  any  possible 
tribunal ;  but  inasmuch  as  there  is  no  significance  in  production  but  as 
a  means  toward  consumption,  and  no  justification  for  saving  but  as 
postponed  service,  it  must  be  as  rational  as  it  is  fundamental  in 
economic  life  that  human  nature  should  prefer  the  immediate  to  the 
distant  good,  and  should  regard  as  an  evil  every  postponed  consump- 
tion that  cannot  through  positive  advantages  establish  a  balance  of 
benefit. 

Expectation  of  increment  is,  then,  everywhere  the  condition  on 
which  depends  the  consent  to  waiting.  Not  merely  every  boy,  but 
every  man,  would  forthwith,  after  breakfast,  proceed  to  make  way  with 
his  lunch  but  for  the  fact  that  a  larger  service  is  recognized  as  attend- 
ant upon  the  later  consumption.  True  it  is,  that  if  there  were  no 
burden  cost  in  waiting,  the  supplies  of  capital  would  be  unlimited ; 
but  it  is  forthwith  to  be  added  that  if  men  could  content  themselves 
with  postponing  the  services  of  wealth  to  an  indefinite  future,  they 
would  never  produce  anything  for  either  earlier  or  later  service. 
Unresisting  postponement  presupposes  and  assumes  an  absence  of  the 
desire  for  goods ;  wealth  eternally  waited  for  is  not  wealth  at  all. 
There  is,  as  all  agree,  no  utility — no  wealth — excepting  as  related  to  a 
human  need  or  desire.  A  desire  for  a  good  never  to  be  enjoyed  is  a 
contradiction  in  terms  ;  a  good  of  this  sort  is  a  no-good.  Unprotesting 
abstinence  implies  the  lack  of  interest  to  produce  and  the  absence  of 
anything  to  be  saved.  Thus,  to  assume  the  general  and  continuous 
non-burdensomeness  of  postponement  is  to  cancel  the  possibility  of  all 


INTEREST  227 

fact  would  present  itself.  The  cow  of  today  would,  for 
example,  outrank  the  cow  and  calf  of  next  year,  if  the 
waiting-time  subtracted  from  the  appraisal  significance  of 

economic  discussion — to  saw  off  upon  the  hither  side  the  limb  upon 
which  all  economists  are  sitting. 

It  is  doubtless  anathema  to  talk  in  economics  of  overproduction  ; 
and  underconsumption  appears  like  an  evasive  and  timid  way  of 
saying  the  same  thing.  It  is  commonly  argued  that  the  desires  of  men 
for  wealth  are  absolutely  insatiable,  or,  if  not  quite  this,  are,  at  least, 
far  beyond  any  practical  possibility  of  satiation ;  goods  in  general 
cannot  be  in  superfluity  so  long  as  the  desires  of  any  member  of  the 
productive  group  are  still  unsatisfied.  Mill's  argument  for  this  posi- 
tion looks  conclusive :  Goods  themselves  furnish  the  demand  for 
goods ;  money  is  a  mere  intermediate  through  which  goods  are  exchan- 
ging against  one  another.  Total  demand  and  total  supply  therefore 
analyze  ultimately  into  the  same  aggregate  of  social  product ;  supply 
can  then  increase  only  as  demand  increases ;  overproduction,  in  any 
other  than  the  purely  relative   sense,  is  then  an   impossibility. 

This  would  all  be  clear  enough  if,  in  fact,  exchanges  were  always 
of  existing  goods  against  existing  goods — if,  that  is,  the  intermediate 
commodity  and  other  forms  of  postponed  purchasing  power  were  not 
factors  in  the  problem.  In  truth,  however,  goods  have  to  be  conceived 
in  another  aspect  than  this  solely  of  present  goods  against  present 
goods ;  the  case  sometimes  presents  itself  as  one  of  present  goods 
against  future  goods,  and  for  this  purpose  moneys  and  credits,  as  the 
form  of  quid  pro  quo  into  which  existing  goods  are  seeking  exchange, 
may  at  one  time  be  receiving  a  much  more  marked  emphasis  than  at 
another.  When  the  exaggerated  desirability  of  postponed  consump- 
tion obtains,  the  demand  for  ordinary  commodities  slackens.  The 
problem  then  transforms  itself  into  this — how  shall  men,  in  the 
average,  increase  their  production  and  sale  of  goods  consistently  with 
a  diminished  buying  and  consuming  of  goods? 

Without  attempting  any  explanation  of  the  causes  lying  behind  the 
recurrent  phenomena  of  commercial  crisis,  and  confining  our  atten- 
tion solely  to  the  post-crisis  period  of  depression,  we  come  upon  two 
contrasted,  though  perhaps  not  conflicting,  lines  of  explanation,  the 
one  interpreting  the  situation  in  terms  of  disturbed  production  react- 
ing upon  consumption,  the  other,  in  terms  of  disturbed  consumption 
reacting  upon  production ;  the  one  position  may  be  stated  as  follows : 

"The  explanation  is  found  in  the  imprenditor  system,  and  for  the 
most  part  in  the  relation  of  employer  with  employee.  The  imprenditor 
buys  raw  materials  and  employs  laborers  for  the  purpose  of  making 
profits.  He  is  a  mere  intermediary.  If  he  is  unable  in  marketing  his 
products  to  make  his  receipts  exceed  his  outlays,  he  withdraws  from 
production,  however  social  interests  may  thereby  suffer. 

"In  the  fall  of  prices  following  a  panic,  not  all  commodities  fall 
with  equal  rapidity.  Goods  from  foreign  sources,  for  example,  may 
nearly  or  quite  hold  their  old  level  of  prices.  Other  products  are 
perhaps  produced  under  conditions  more  or  less  approaching  monopoly ; 
others  again  may  be  well  sustained  in  price  through  speculative  hold- 
ings by  the  producers  or  through  restriction  of  output.     The  imprendi- 


228  VALUE  AND  DISTRIBUTION 

the  future  good  at  a  greater  rate  than  the  objective  pro- 
ductivity of  the  good  could  add. 

And  now  we  ask :    On  what  terms,  in  an  individualistic 

tor  must  produce  in  view  of  market  prices ;  prices  are  his  master. 
If  his  productive  outlays  are  too  high,  he  must  withdraw  from  business. 
There  is,  however,  for  most  employers,  one  resource  and  one  only, 
that  of  reducing  wages.  A  small  reduction  may  possibly  be  sufficient. 
But  here  is  precisely  the  kernel  of  the  difficulty.  Even  were  raw 
materials  for  all  industries  falling  regularly  and  equally,  the  imprendi- 
tor  would  still  be  compelled  by  lower  prices  of  product  to  reduce  the 
wages  paid.  As  a  practical  fact  this  is  a  difficult  matter.  Laborers 
resist  angrily  and  persistently.  They  do  not  understand  the  necessity 
of  the  reduction — they  believe  that  they  have  merely  to  stand  firm. 
To  prevent  a  strike  or  a  long  continuance  of  strained  relations,  the 
employer  often  finds  it  not  less  profitable  and  much  more  comfortable 
to  close  his  shop.  In  times  of  depression  products  are  small  enough 
at  the  best. 

"Inertia  is  a  fact  that  must  be  reckoned  with.  Wages  rise 
slowly  and,  when  fall  is  inevitable,  fall  slowly  and  with  painful  strug- 
gle  Were   it   possible   for   prices   to    fall   evenly   all    along   the 

line,  and  for  wages  to  be  forced  to  fall  in  conformity  with  prices,  the 
depression  following  upon  panic  would  be  unimportant  and  of  short 
duration.  But  (i)  as  long  as  indebtedness  does  not  fall  as  measured 
in  money  units,  there  is  tremendous  resistance— in  many  cases  a 
struggle  for  very  financial  existence — against  sale  and  liquidation  at  the 
ruling  level  of  prices.  Even  were  this  difficulty  avoided  .... 
there  would  still  remain  (2)   the  inequalities  already  mentioned  in  the 

fall  of  commodities  generally (3)   The  difficulty  of  accurately 

adjusting    wage-payments    to     market    prices Capital,     labor, 

and  employer  must  co-operate  in  production.  If  with  any  employer 
laborers  insist  upon  all,  or  more  than  all,  of  the  product,  production 
must  cease." — Davenport,   op.   cit.,   p.   363. 

To  Say,  whose  loi  de  debauchees  was  the  beginning  of  the  doctrine 
that  a  general  overproduction  is  impossible,  and  whose  reasoning  was 
later  accepted  in  turn  by  James  Mill,  by  John  Stuart  Mill,  and  by 
Cairnes,  this  disturbed-production  explanation  of  depression  would 
have  been  entirely  satisfactory.  But  as  usual,  Malthus  was  a  sceptic  ; 
and  in  his  insurgency  against  the  doctrine  of  the  impossibility  of  a 
"general  glut,"  he  contrived  finally  to  put  himself  into  conflict  with 
Ricardo.  This  noteworthy  controversy  will  serve  us  in  good  stead  as 
background    for   our  general   problem  : 

"According  to  the  best  authorities  ....  what  is  meant  by  the 
glut  of  a  particular  commodity  is  such  an  abundant  supply  of  it  com- 
pared with  the  demand  as  to  make  its  price  fall  below  the  cost  of  pro- 
duction ;  and  what  is  meant  by  a  general  glut  is  such  an  abundance  of 
a  large  mass  of  commodities  of  different  kinds,  as  to  make  them  all 
fall  below  the  general  price,  or  the  ordinary  costs  of  production,  with- 
out any  proportionate  rise  of  price  in  any  other  equally  large  mass  of 

commodities Mr.    Mill    endeavors    to    show    that   demand    and 

supply  are  always  equal  in  the  aggregate  ;  that  an  oversupply  of  some 
commodities  must  always  be  balanced  by  an  undersupply  of  others ; 
and  that  therefore  a  general  glut  is  impossible."     (Rev.  T.  R.  Malthus, 


INTEREST  229 

non-money  economy,  should  one  man  lend  to  another  man 
a  cow  ?  At  the  minimum,  the  payment,  whether  agreed  to 
be  made  in  terms  of  cows  or  in  terms  of  other  utilities, 

Deilnitions  in  Political  Economy,  London,  John  Murray,  1827,  chap, 
on  James  Mill.)  And  Malthus  rightly  points  out  that  Mill  would  be 
entirely  t;orrect  here  if  demand  meant  nothing  more  than  the  amount 
consumed  ;  doubtless  the  entire  product  may  be  sold  and  be  consumed  at 
some  price,  but  not  necessarily  at  a  price  remunerative  to  the  producers  ; 
if  nothing  more  is  meant  by  Mill  than  to  assert  that  consump- 
tion will  equal  production,  "this  ....  is  really  no  more  than  say- 
ing that  if  commodities  were  produced  in  such  abundance  as  to  be  sold 
at  half  their  costs  of  production,  they  would  still  be  somehow  or  other 
consumed — a  truism  equally  obvious  and  futile.  But  ....  Mr. 
Mill  ....  observes,  'It  is  evident  that  whatever  a  man  has  pro- 
duced and  does  not  want  to  keep  for  his  own  consumption  is  a  stock 

which    he   may   give   in   exchange   for   other  commodities His 

demand  is  actually  equal  to  the  amount  which  he  has  produced  and 
does  not  mean  to  consume!'"  {Elements  of  Pol.  Econ.,  sec.  3,  p.  225.) 

But  Malthus  insists  that  hats  and  shoes  may  very  well  be  selling 
against  each  other  at  the  old  ratios  and  yet  both  be  selling  at  less 
than  cost ;  the  question  is  merely  whether  this  can  be  true  for  com- 
modities generally.  "The  hop-planter  who  takes  a  hundred  bags  of 
hops  to  Wighill  fair,  thinks  little  more  about  the  supply  of  hats  and 
shoes  than  he  does  about  the  spots  in  the  sun.  What  does  he  think 
about,  then?  and  what  does  he  want  to  exchange  his  hops  for?  Mr. 
Mill  seems  to  be  of  opinion  that  it  would  show  great  ignorance  of 
political  economy  to  say  that  what  he  wants  is  money ;  yet  .... 
it  really  is  money  that  he  wants  and  ....  this  money  he  must 
obtain  ....  in  exchange  for  the  great  mass  of  what  he  has 
brought  to  market,  or  he  will  be  unable  to  carry  on  his  business  as  a 
hop-planter ;  ....  he  must  pay  the  rent  of  his  hop  grounds  in 
money ;    ....   he   must   pay    for   his   poles,    his  bags,    his   implements 

in     money He     must    pay     the    laborers   ....   during     the 

course  of  the  next  year  in  money,  and  .  .  .  .  it  is  in  money  and  in 
money  alone  of  all  the  articles  brought  to  the  fair,  that  he  can  calculate 
his  profits." 

We  may  stop  to  note  that  Malthus  is  probably  right  here  as  to 
the  actual  psychology  of  the  case ;  people  do  look  at  things  in  this 
way  ;  and  perhaps  it  does  not  matter  to  the  argument  whether  or  not 
they  ought.  But  all  the  while,  the  precise  question  at  issue  is  not 
entirely  clear.  Malthus  says  it  is  whether  commodities  generally  may 
not  be  being  produced  at  a  loss  to  the  producers.  "True  ....  the 
landlords  and  laborers  who  are  paid  in  money  will  finally  exchange  it 
for  something  else,  as  no  one  enjoys  money  in  kind,  except  the  miser  ; 
but  the  landlord  ....  would  be  little  inclined  to  accept  from  the 
planter  the  articles  which  he  could  get  at  the  fair  in  exchange  for  his 

hops And   as   matter    of   fact   the   laborer   ....   is   paid    in 

money. 

"Foreign  trade  is  no  doubt  mainly  a  trade  of  barter.  But  the 
question  whether  British  woolens  find  an  adequate  market  in  the 
United  States  does  not  depend  upon  their  purchasing  the  same 
quantity  of  tobacco  as  usual,  but  upon  whether  the  tobacco  or  whatever 
the    return   may   be,    will    purchase   the    British    money    or    the    British 


230  VALUE  AND  DISTRIBUTION 

would  need  be,  to  the  lender,  in  view  of  all  his  circum- 
stances, of  as  great  significance  as  the  present  cow,  whether 
as  immediate  consumption  good  or  as  a  production  good  to 
be  kept  in  the  possession  of  the  owner.    That  is  to  say,  the 

labor  necessary  to  enable  the  woolen  manufacturer  to  carry  on  his 
business  successfully.  If  woolen  and  tobacco  are  both  below  the  costs  of 
manufacture   in   money   or   labor,    both    parties    may   be   carrying   on   a 

losing   trade This    is   an    answer   to    the    pamphlet   which    M. 

Say  addressed  to  me   some  years   ago.    .    .    .   The   power   of   replacing 

capital  will  mainly  depend  on  the  power  of  commanding  labor 

Commodities  in  general  ....  are  continually  rising  or  falling  in 
money  price  ....  while  the  money  price  of  labor  remains  much 
more  nearly  the  same, 

"The  question  of  a  glut  is  exclusively  whether  it  may  be  general, 
as  well   as  particular,   and   not   whether   it   may   be  permanent   as   well 

as   temporary What  are   the   costs  of  production?     They   are 

either  the  amount  of  money  necessary  to  repay  the  labor  worked  up  in 
the  commodity,  and  in  the  tools  ....  etc with  the  ordi- 
nary profits,   etc or  they  are  the  quantity  of  labor  in  kind, 

etc Now    surely    it    cannot    be    denied    theoretically    that    all 

commodities    produced    in    this    country    may    fall    in    comparison    with      , 
a  commodity  produced   in  Mexico.     As  little  can  it  be  denied  theoret-    / 
ically  that  all  commodities  produced  by  British  labor  may  fall  in  com- 
parison with  that  labor."  "^ 

Malthus  makes  no   question   that  the   glut   will   be   quickly    followed    ^^ 
by  reduced  production,  and  appears  to  regard  this  as  a  fact  of  remedy 
rather  than  a  second  and  aggravated  stage  of  the  disease. 

As  Malthus  has  drawn  the  issue  between  himself  and  Mill,  Malthus 
is  clearly  enough  right ;  wages  and  raw  materials  and  contractual 
obligations  do  not  keep  pace  in  change  with  the  course  of  general 
prices ;  the  phenomena  neither  of  boom  nor  of  post-panic  depression 
can  be  understood  excepting  in  the  light  of  this  fact.  But  the  larger 
question  whether,  irrespective  of  costs'  and  entrepreneur  profits,  and  of 
continuing  entrepreneur  activity,  the  production  of  goods  may  outrun 
temporarily  the  disposition  to  consume  at  no  matter  how  low  a  price, 
is  not  touched  by  this  discussion.  Malthus,  indeed,  admits,  as  we  have 
seen,  that  all  the  goods  can  and  must  find  consumers.  In  other  places, 
however,  in  order  that  entrepreneur  profits  be  maintained,  he  recom- 
mends luxurious  consumption  as  temporary  remedy  ;  and  it  was  upon 
this  issue  that  Ricardo  entered  the  lists.  (See  Bonar,  Letters  of 
Ricardo  to  Malthus,  op.  cit.,  pp.  188-90.) 

But  upon  the  question  whether  present  consumption  may  not  be 
too  greatly  limited  beyond  the  possibility  of  the  savings  being  absorbed 
by  social  capitalization,  and  with  a  concurrent  overemphasis  upon  the 
securing  of  representatives  of  reserved  and  postponed  purchasing 
power — goods  refusing  to  exchange  against  each  other,  but  only 
against  some  form  of  long-time  intermediary — this  discussion  throws 
no  light. 

The  problem  of  the  relation  of  more  liberal  credit  to  the  demand 
for  goods,  and  of  the  relation  of  credit  to  speculative  activity,  and 
thereby   to   the   general   level    of  prices,    is   also   really   involved   in  the 


INTEREST  231 

loan  must  offer  to  the  lender  the  promise  of  greater  service 
to  him  than  either  of  the  other  two  methods  open  to  him — 
consumption  and  personal  exploitation. 

To  the  borrower  likewise  the  question  will  present  itself 

discussion.  According  to  the  usual  view  of  the  relations  between 
demand  and  supply  of  products,  demand  and  supply  being  regarded  as 
merely  different  aspects  of  the  same  aggregate  of  goods,  it  is  difficult 
to  see  how  credit  can  be  conceived,  relatively  to  supply,  as  an 
increased  demand  or  as  an  increase  in  the  total  volume  of  purchasing 
power.  In  this  view  of  the  case,  expanding  credit  could  have  no  bear- 
ing upon  prices,  no  matter  what  might  or  might  not  be  the  effect  upon 
interest  rates — relations  between  present  and  future — excepting  as, 
through  the  use  of  credit  as  substitute  for  money,  the  money  com- 
modity is  in  effect  made  greater  in  supply. 

But  if  credit  be  regarded  as  expressing  some  modification  in  social 
attitude  toward  present  goods  and  present  consumption  as  against  the 
future — an  emphasis  upon  the  present,  with  an  enlarged  disposition  to 
promise  heavily  against  the  future,  in  order  to  have  in  the  present — the 
case  takes  on  a  new  aspect.  And  really  speculation  is  nothing  but  the 
desire  to  have  now,  on  terms  of  promise  against  the  future,  with  the 
hope,  it  is  true,  that  the  future  by  its  larger  prices  will  justify,  in 
terms  of  price  gain,  the  hurry  of  acquisition.  It  is,  in  last  analysis, 
an  emphasis  upon  present  goods,  through  present  purchasing  power 
in  terms  of  money,  as  against  future  money  or  money  credits. 

It  is  implied  in  all  this,  and  needs  be  clearly  accepted,  that  the 
purchasing  power  which  is  being  offered  against  present  goods  is  not  at 
any  time  solely  other  present  goods  or  the  suspended  purchasing  power 
into  which  they  have  been  converted.  At  all  times  future  facts  are  a 
part  of  the  present  offer,  and,  as  credit  is  varying  in  volume,  are  a 
fluctuating  share  in  the  total  volume  of  offer.  The  granting  of  credit 
is  really  a  method  of  making,  out  of  putative  future  purchasing  power, 
a  present  purchasing  power ;  the  business  of  discount  banking  is 
essentially  nothing  but  the  underwriting  of  these  undertakings  against 
the  future.  The  present  purchasing  power  thus  created  thereupon 
becomes  a  part  of  the  present  money,  or  money  equivalent,  offering 
itself  as  demand  against  present  goods.  Two  effects  are  manifest : 
(i)  a  rise  in  the  rate  of  interest,  that  is  to  say,  more  favorable  terms 
for  present  purchasing  power  as  against  future  purchasing  power,  the 
new  initiative  being  with  the  offers  of  future  purchasing  power  ;  (2) 
since  future  purchasing  power  is,  through  its  credit  representatives, 
functioning  as  currency,  there  comes  about  a  modification  in  the 
exchange  relations  between  the  unit  of  currency  and  the  commodities 
against  which  currency  is  being  exchanged,  that  is  to  say,  the  level  of 
prices  is  modified. 

But  to  return  to  our  specific  question — the  social  bearing  of  an 
unusually  marked  disposition  on  the  part  of  producers  and  sellers  to 
refuse  to  exchange  present  goods  against  present  goods  and  to  demand 
in  exchange  deferred  rights  of  purchase — money-cash,  credits,  or  well- 
secured  promises  ;  it  is  clear  enough  that  a  generally  lower  price  level 
must  result ;  but  is  it  at  all  clear  that  this  change  in  price  level  must 
succeed  in  marketing  the  goods   in   exchange   for  other  goods,   to  the 


232  VALUE  AND  DISTRIBUTION 

in  terms  purely  of  service,  of  utility;  can  he  obtain  such 
terms  of  interest  charge  as  to  provide,  after  payment  of  the 
principal  and  its  agio,  a  surplus  of  advantage? 

With  the  establishment  of  a  money  economy,  the  prob- 
lem remains  the  same  in  essentials;  the  calculus  is  still  one 
of  balance  of  utility. 

And  in  the  more  complicated  industrial  organization 
also,  the  entrepreneur  is  seeking  a  balance  of  utility  for 
himself,  although  it  is  true  that  here  the  computation  has  to 
be  worked  out  as  the  final  summing-up  and  outcome  of  a 
series  of  market-price  computations.     The  medium  in  all 

result  of  terminating  the  glut,  and  without  enforcing  a  restriction  of 
production  ?  Or  is  it  rather  true  that  otherwise  than  so  far  as  the 
new  price  level  modifies  the  prevailing  psychological  attitude  toward 
consumption,  there  must  be,  for  a  time,  an  adequate  market  for  only 
those  goods  ministering  to  the  more  primary  classes  of  needs? 

The  period  preceding  crisis  is  one  of  extremely  high  aggregate  and 
per-capita  productiveness  of  goods ;  all  productive  energies  have  been 
fully  employed,  enterprise  functioning  at  the  extreme  of  pressure.  The 
demonstration  of  this  is  convincingly  found  in  the  prevailingly  high 
level  of  consumption ;  with  every  wage-earner  there  goes  the  full 
dinner  pail.  Among  the  laborers  there  is  taking  place  a  higher  average 
consumption  of  clothing,  of  minor  comforts,  and  of  luxuries.  Not 
only  this,  but  the  social  production  has  been  sufficiently  large  to 
permit,  over  and  above  immediate  necessities,  the  acquisition  of  a 
goodly  amount  of  durable  consumption  goods— more  and  better 
personal  belongings,  books,  pictures,  household  furnishings.  Meanwhile 
also,  in  the  more  distinctly  capitalistic  field,  it  will  be  found  that  the 
social  productiveness  has  made  it  possible,  through  saving,  that  there 
be  constructed  miles  and  miles  of  new  dwellings  and  of  business  blocks 
— new  streets  with  grading,  paving,  and  sewers,  and  generally  the 
extension  of  all  sorts  of  public  improvement,  and  the  development  of 
all  kinds  of  quasi-public   utilities. 

Of  the  farmer  it  can  be  said  that  never  was  his  farm  in  better 
cultivation,  his  land  so  expensively  and  adequately  drained  and  fenced, 
•his  herds  so  large,  his  barns  so  capacious  or  in  so  good  repair,  or 
his  house  so  spacious  or  so  well  furnished.  Turning  to  still  more 
general  conditions  of  accumulated  wealth,  it  may  be  said  that  never 
were  the  factories  so  large  or  so  well  equipped  with  the  different 
instruments  and  appliances  of  production ;  and  never  were  the  ware- 
houses so  large  to  receive  the  outpouring  volumes  of  product.  These 
prosperous  years  have,  it  is  true,  consumed  largely  out  of  their  pro- 
duction, but  at  the  same  time  it  has  been  possible  to  construct  and 
equip  railroad  systems  spanning  entire  continents,  and  to  have  re- 
equipped  all  the  systems  earlier  constructed. 

And  how  has  it  all  been  possible?  Doubtless  the  ultimate  explana- 
must  be  in  the  surpassing  volume  of  production  ;  but  within  this,  and 
made  possible  by  it,  was  the  enormous  volume  of  saving. 

But    how,    under    the    existing    economic    organization,    does    this 


INTEREST  233 

the  entrepreneur's  computations  remains  a  money  medium ; 
he  must  get  money  gain,  but  this  in  order  finally  to  get  the 
maximum  of  utility  gain.  He  borrows  present  money 
against  future  money,  or,  more  accurately,  he  borrows 
present  purchasing  power  against  the  obligation  of  later 
payment  according  to  the  same  standard.  Hence  the  inter- 
est problem,  as  it  presents  itself  in  actual  affairs,  is  the 
sale  of  present  purchasing  power,  expressed  in  terms  of  the 
standard,  against  future  purchasing  power,  expressed  in 
like  terms.     As  Galiani  wrote  a  century  and  a  half  ago : 

Hence  arise  the  kindred  phenomena  of  exchange  and  interest, 
the  one  being  an  equation  between  money  present  and  money  distant 
in  space  ....  in  order  to  equalize  the  intrinsic  value  of  the 
one  or  the  other  diminished  by  the  lesser  convenience  or  the  greater 
danger.  Interest  is  the  same  equation  made  between  money  pres- 
ent and  money  distant  in  time,  time  here  operating  in  the  same 
way  as  space.^ 

saving  take  place  ?  Usually,  as  we  have  seen,  through  the  restricted 
consumption  of  some  individuals  or  classes  in  society,  and  the  lending 
of  this  saved  purchasing  power — this  loan  fund — to  others,  mostly  for 
the  purposes  of  the  creation  of  social  capital. 

It  is,  then,  the  need  of  new  railroads,  new  factories,  new  appli- 
ances, and  new  equipment  that  has  furnished,  and  that  alone  could 
furnish,  the  market  for  new  savings  and  the  possibility  that  these  new 
savings  could  express  themselves  in  an  increasing  social  capitalization. 
It  is  indeed  evident  that,  if  savings  will  not  capitalize  into  forms  of 
intermediate  social  wealth,  there  can  be  no  market  outlet  fol  the 
savings  unless  it  be  in  consumption  loans,  that  is,  in  class  indebted- 
ness, dubiously  secured,  or  in  government  wastes  and  government  wars. 
We  are,  then,  within  reach  of  our  conclusions :  with  the  restriction 
of  the  disposition  to  consume,  there  is  neither  the  market  to  absorb 
the  productive  output  of  society,  nor  even  the  market  to  employ  the 
existing  productive  equipment ;  capitalization  cannot  take  place ; 
savings,  in  any  considerable  volume,  become  an  impossibility  because 
of  no  market  for  them ;  there  is  nothing  for  the  case  but  a  sharp 
restriction  of  the  productive  output  of  society.  A  temporary  lowering 
in  the  standard  of  living  takes  place  ;  meanwhile  some  tendency  is  mani- 
fest toward  the  displacement  of  labor  through  competing  surplus-capital 
equipment,  to  the  extent,  that  is,  that  the  existing  supplies  of  instru- 
mental goods  are  adapted  to  serve  in  relation  to  labor  rather  as  substi- 
tutionary than  as  complementary  goods.  In  large  part,  however,  it  is 
true  that  the  existing  capital  goods  are  rather  complementary  than 
substitutionary  in  their  technological  relation  to  labor,  and  that  hereby 
labor  receives  employment  so  far  as  the  capital  itself  is  able  to  find 
employment. 

^  Delia  Moneta,  Book  V,  chap,  i,  p.  243,  quoted  by  Pantaleoni, 
op,  cit.,  p.  26.     Pantaleoni,  however,  appears  to  be  wrong  in  interpret- 


234  VALUE  AND  DISTRIBUTION 

The  proposition  that  instrumental  goods  are  productive 
in  time  needs  no  demonstration  or  elucidation,  so  far  as 
concerns  mere  productivity  by  weight  and  tale ;  all  instru- 
ments or  agents  of  production — land  and  labor  as  well  as 
machines  and  appliances — manifest  their  productivity  only 
with  time. 

But  here,  as  we  have  seen,  two  problems  are  presented: 
(i)  How  infer  that  this  weight-and-tale  productivity  is  also 
a  value  productivity?  (2)  Why,  if  value  productivity  attends 
the  instrument  with  lapse  of  time,  is  this  value  increase  not 
reflected  back  upon  the  value  of  this  instrument  and 
expressed  as  part  of  the  present  value — the  value  increase 
thus  disappearing  by  this  very  fact  of  absorption? 

I.  Boehm-Bawerk's  solution  of  this  difficulty  of  proving 
concrete  productivity  to  be  value  productivity,  was  merely 
to  assert  it  as  self-evident;  there  may,  he  admitted,  be 
occasional  cases  where  the  increase  in  concrete  product  is 
more  than  ofifset  by  the  effect  of  the  increasing  supply  to 
depress  the  item  price,  but  these  cases  are  assumed — and 
thereupon  declared — to  be  so  far  exceptional  as  to  leave 
unimpaired  the  generalization  that  value  increases  with 
increasing  supply. 

But  again  the  inquiry  presents  itself — is  the  problem 
after  all  a  question  of  value?  and  if  so,  in  what  sense? 
For  all  possible  entrepreneur  purposes  the  outcome  is  sub- 
stantially one  of  value  increase,  if  only  the  later  product 
exchanges  for  more  money  than  did  the  earlier  borrowed 
sum.  It  is,  then,  for  entrepreneur  purposes,  necessary 
simply  that  the  exchange  power  of  money  relatively  to 
commodities  in  general  have  not  changed;  it  must  in  such 
case  be  true  that  an  increased  number  of  items  imports  an 
increase  in  the  aggregate  price,  if  only  the  per-item  price 
of  the  particular  product  has  not  especially  suffered.  If, 
then,  the  influence  of   technique,  together  with   all   other 

ing  this  passage  as  reducing  the  whole  question  of  interest  to  the 
cause  of  contingency ;  the  aspect  of  lesser  convenience  might  well  be 
taken   to    include   the    deprivation    of   the   use   during   the   loan   period. 


INTEREST  23s 

co-operating  influences  bearing  upon  price,  has  been  of  a 
sort  to  leave  the  general  price  level  undisturbed,  a  general 
increase  in  weight-and-tale  output  must  attach  a  general 
price  advance  to  the  aggregate  product.  If  there  are 
exceptional  industries  where  the  aggregate  price  product 
suffers  despite  the  increase  in  the  number  of  items  pro- 
duced, there  must  thereby  be  a  still  more  marked  price 
productivity  for  the  remaining  industries  in  the  aggregate. 
Failure  to  manifest  price  productivity  is  thereby  proved  to 
be  exceptional,  and  basis  is  established  for  the  only  kind 
of  value  productivity  which  at  all  concerns  the  present 
problem — the  explanation  of  interest-offering  under  entre- 
preneur production. 

2.  But  why  is  the  increase  in  price  product  not  reflected 
back  upon  the  price  or  value  of  the  productive  instrument 
itself,  and  expressed  under  the  form  of  its  increased 
present  worth? 

The  first  answer  is  that  it  is  so  reflected.  Even  though 
an  instrumental  good  may  also  be  capable  of  use  as  con- 
sumption good,  it  cannot  serve  in  both  capacities  at  one 
and  the  same  time;  the  situation  is  one  of  alternatives.  As 
production  good  the  present  worth  is  based  solely  upon  the 
value  of  the  future  product,  and  is  purely  the  resultant 
thereof.  True,  the  cow  may  command  $50  for  immediate 
consumption  as  beef,  or  may  bear  a  $50  value  for  dairy  and 
breeding  purposes ;  but  either  aspect  excludes  the  other.  In 
the  aspect  of  productive  instrument,  then,  our  problem 
formulates  itself  as  follows :  Why  is  not  a  fifty-dollar  cow 
now  worth  fifty-five  dollars,  if  only  it  and  its  increase  will  at 
the  end  of  the  year  be  worth  fifty-five  dollars?  And  this  is 
merely  to  ask,  why  will  not  the  cow  now  exchange  for 
more  of  other  things,  if  at  the  end  of  a  year  it  will  so 
exchange?  It  is,  perhaps,  answer  enough  for  present  pur- 
poses to  say  that  the  cow  has  today  exchange  relations 
against  other  things  all  of  which,  in  their  aspect  of  present 
purchasing  power,  have  this  same  potentiality  of  increase. 

But  it  remains  to  ask,  why  have  all  present  values  the 


236  VALUE  AND  DISTRIBUTION 

same  productivity  in  rate  of  increase?  Some  production 
goods  appear  to  increase  by  only  a  fraction  of  themselves 
annually,  cows,  e.  g.,  bringing  forth  young  but  once  a  year, 
while  rabbits  multiply  ten  or  twelve  times ;  and  still  other 
productive  instruments  bring  forth  some  thirty  and  some 
sixty  and  some  a  hundred  fold.  Is  the  answer  to  be  sought 
in  the  degree  of  dependence  upon  other  productive  influ- 
ences— the  attendant  higher  expense  in  getting,  e.  g.,  the 
rabbit  increment  upon  the  market — or  in  the  land  and 
labor  and  implement  outlays  of  maturing  the  highly  multi- 
plying yield  of  grain?  The  facts,  however,  will  hardly 
bear  out  this  explanation ;  we  shall  rather  have  to  refer 
ourselves  to  the  greatly  falling  per-item  price  of  the  more 
readily  multiplied  commodities ;  we  must  invoke  the  prin- 
ciple that  entrepreneurs  and  entrepreneur  capital  will  direct 
themselves  into  these  mathematically  attractive  enterprises, 
until,  with  lowering  prices  in  connection  with  the  collateral 
costs  and  burdens,  the  purely  mathematical  advantages  are 
fully  offset. 

But  even  so,  we  have  the  necessity  still  before  us  to 
explain  the  general  rate  of  price  increment,  that  is,  of  time 
discount. 

Is  it  enough  for  this  to  show  that,  through  technological 
influences,  present  price  has  the  power  to  grow,  at  the 
actual  rate  of  increase,  into  future  price?  Does,  then,  the 
long-continuing  fall  in  the  rate  of  interest  indicate  a  slow- 
ing-up  in  the  rate  of  weight-and-tale  reproductiveness  of 
instrumental  goods,  despite  all  the  technological  advances  of 
these  later  years?  Why  is  the  rate  of  increase  as  it  is,  and 
why  as  low  as  it  is?  There  is  a  suggestion  here  that  some- 
how all  lines  of  production  that  are  markedly  instrumental 
in  their  technique,  have  so  suffered  a  price  fall  in  their 
respective  products  that  the  weight-and-tale  productivity 
of  the  instruments  has  been  more  and  more  absorbed  under 
the  guise  of  rising  compensations  to  the  co-operating  pro- 
duction costs,  interest  suffering,  we  will  say,  to  the 
advantage  of  wages.     And  if  so,  why  has  this  taken  place 


INTEREST  237 

to  the  precise  extent  that  recent  facts  disclose?  Need  it 
ever  stop?     What  influences  are  setting  the  limit? 

Let  it  be  supposed  to  be  today  possible  to  foresee  that 
each  and  every  item  of  wealth  in  existence  today  will 
tomorrow,  by  its  own  inner  necessity  and  activity,  be  repre- 
sented by  two  similar  items.  To  assert  that  the  one  item  of 
today  would  have  the  same  value  or  price  as  two  items  of 
tomorrow  would  have  but  one  possible  meaning.  There  is 
no  reason  why  the  exchange  relations  obtaining  today 
between  different  commodities,  or  between  commodities 
and  money,  should  be  in  any  wise  different  tomorrow ;  thus 
an  item  of  today  should  buy  the  same  amount  of  other 
items  or  of  money  as  an  item  of  tomorrow  will  buy  tomor- 
row ;  there  are  merely  two  items  tomorrow  for  every  one  of 
today ;  and  two  items  of  tomorrow  must  command  of  other 
commodities  or  of  money  twice  as  much  as  one  item  of 
today  will  command. 

Thus  any  question  of  equality  of  value  or  of  price 
between  today's  situation  and  that  of  tomorrow  can  refer 
only  to  the  exchange  relations  which  must  come  to  exist 
between  the  one  item  of  today  and  the  two  of  tomorrow, 
both  being  expressed  in  terms  of  the  same  system  of 
exchange  values.  These  relations  must  then  be  stated 
either  (i)  in  terms  of  the  present  system,  so  that  tomor- 
row's two  items  are  discounted  at  the  rate  of  50  per  cent, 
into  present  price,  the  bank-discount  manner  of  statement; 
or  (2)  that  today's  items  draw  interest  at  the  rate  of  100 
per  cent,  in  taking  rank  in  tomorrow's  system  of  price. 

In  either  case,  items  are  transferred  from  one  price 
system  into  the  other  only  by  virtue  of  the  principle  of 
interest  agio,  time  discount. 

And  in  the  case  assumed,  a  case  of  no  co-operating 
effort  or  pain  or  care,  and  of  no  outside  instrumental 
co-operation — a  case  also  in  which  all  things,  provisions, 
lands,  machines,  durable  goods,  everything,  have  doubled — 
the  discount  rate  would  be  50  per  cent.,  or  the  interest  rate 
100  per  cent. 


238  VALUE  AND  DISTRIBUTION 

But  all  this,  while  it  may  make  clear  the  broad  general 
principle  and  basis  of  time  discount,  leaves  unsolved  all  the 
distributive  difficulties  inevitably  to  emerge  as  the  various 
co-operating  influences  are  found  to  have  part  in  bringing 
about  the  increase  in  price  product.  And  possibly  enough 
we  have  some  difficulties  to  consider  in  the  very  phenome- 
non of  money  price  itself.* 

*  Because,  in  the  discussions  to  follow,  the  emphasis  upon  price 
as  the  peculiar  and  leading,  if  not  the  exclusively  important,  aspect 
of  value,  will  become  increasingly  pronounced,  there  appears  to  exist 
the  logical  requirement,  if  not  the  practical  necessity,  of  including 
within  any  general  discussion  of  value  an  examination  of  the  nature 
of  money  and  a  study  of  the  process  of  price  adjustment.  To  omit  this 
appears  to  assume  either  (i)  that  monetary  theory  is  so  far  a  field  of  its 
own  with  its  own  peculiar  difficulties  and  problems,  as  to  render  mone- 
tary doctrine  impracticable  of  discussion  here,  and  as  to  enforce,  for 
present  purposes,  the  uncritical  acceptance  of  the  generally  received 
doctrines  ;  or  (2)  that  monetary  theory  is,  in  its  value  aspects,  so  far 
at  one  with  value  theory  in  general,  as  reasonably  to  dispense  with  any 
special  treatment. 

But  even  were  this  second  view  adopted,  some  justification  for  the 
adoption  of  it  could  fairly  be  demanded.  The  truth,  however,  appears 
to  lie  with  the  first  assumption,  that  the  problem  of  price  would,  if 
entered  upon  here,  lead  us  in  many  directions  over-far  afield.  Little 
more,  then,  can  in  this  place  be  attempted  than  a  summary  statement 
of  the  grounds  appearing  to  justify  this  view. 

The  explanation  for  the  relatively  inelastic  character  of  the 
money  supply  carries  us  over,  on  the  one  side,  into  the  technology  of 
gold  production,  and  into  the  nature  and  degree  of  gold  consumption ; 
on  the  other  side,  into  the  peculiar  nature  of  the  demand  for  money, 
and  thereby  into  the  recognition  that,  as  Marx  has  put  it,  "Gold, 
when  a  mere  commodity,  is  not  money"  (Das  Capital,  Book  I, 
chap,  iii,  sec.  2).  But  in  the  purely  supply  aspect  of  the  problem, 
it  is  perhaps  true  that  no  great  difficulty  need  be  experienced. 

It  is  on  the  demand  side  of  the  money-value  investigation,  and 
especially  with  reference  to  the  nature  and  the  basis  of  this  demand, 
and  with  reference  also  to  the  interactions  and  adjustments  between 
the  demand  for  gold  as  commodity  and  the  demand  for  gold  as  money, 
that  monetary  theory  becomes  at  once  difficult  and  controversial. 
Here  credit  influences  present  themselves  for  analysis — present, 
indeed,  in  the  first  instance,  the  problem  whether  they  may  not  rightly 
rank  rather  as  within  the  money-supply  category  than  as  within  the 
demand-diminishing  category.  Here  also  the  various  quantity  theories 
formulate  themselves  as  issues — the  relation  and  the  reaction  of  credit 
on  prices  and  of  prices  on  credit,  and  the  like. 

On  the  whole,  therefore,  a  theory  of  value  need  not  stand  or  fall 
with  a  theory  of  price,  nor  need  a  theory  of  price  especially  concern 
itself  with  the  broader  and  deeper  problems  of  value  in  general.  Gold- 
value    price,    Geld-Preis,    is    an    independent    subdivision    of   the    broad 


INTEREST  239 

But  we  have  not  yet  finished  with  the  nearer-lying  diffi- 
culties on  the  demand  side  of  the  interest  equation.  So 
much  as  this  is  already  evident,  that  the  preference  for 
goods  for  present  consumption,  the  abstinence  or  "per- 
spective" influence,  as  well  as  the  demand  for  present 
goods  for  purposes  of  industrial  or  commercial  gain,  and  all 
the  preferences  that  run  toward  present  goods  by  reason 


value  field  and  claims  its  place  as  separate  subdivision  precisely  because 
it  has  more  than  enough  of  difficulties  of  its  own. 

With  this  preamble  of  caution,  of  disclaimer,  and  of  apology, 
some  of  the  connections  and  some  of  the  separations  of  value  theory 
in  general  and  price  theory  in  particular  may  be  noted. 

To  money  in  its  aspect  of  general  purchasing  power,  and  as 
symbol  and  equivalent  of  consumption  goods,  the  principle  of  falling 
utility  applies  as  a  fact  of  the  individual  experience.  But  as  inter- 
mediate, not  to  consumption,  but  to  exchange,  the  principle  does  not 
apply.  The  more  or  less  of  the  exchange  medium  in  the  possession  of 
any  individual,  and  the  more  or  less  of  the  exchange  medium  in  society, 
and  the  general  level  of  prices  in  society,  are  each  and  all  irrelevant 
to  the  advantages  derivable  by  the  individual  from  the  opportunities 
offered  by  exchange  ;  only  goods  in  hand  and  goods  wanted  are  essential. 
Thus,  while,  in  a  loose  and  general  way,  under  the  rich-man- 
poor-man  comparison,  the  possessor  of  a  large  supply  of  any  one  com- 
modity, or  of  commodities,  or  of  purchasing  power  in  general,  may  be 
said,  as  compared  with  the  respective  utilities  offered  to  the  possessor 
of  the  smaller  supply,  to  hold  at  a  low  marginal  utility,  no  comparison 
of  this  sort  is  possible  for  money  as  intermediate  of  exchange.  The 
ratio  relation  between  the  things  to  be  had  and  the  things  to  be  fore- 
gone in  the  application  of  purchasing  power  exists  for  both  men,  and 
is  the  same  ratio  of  equality  for  all  marginal  applications  of  purchas- 
ing power,  but  the  absolute  volume  of  the  utilities  compared  in  the 
computation  of  buying  and  foregoing  are  not  to  be  known  by  the  fact 
of  exchange  or  to  be  even  vaguely  inferred  from  it. 

The  principle  that  with  any  commodity  successive  increments  of 
supply  attach  to  lower  and  lower  individual  needs,  and  thus  that,  with 
each  individual,  successive  increments  of  purchasing  power  afford 
per  unit  a  smaller  and  smaller  significance,  and  that  thereby,  in 
society  as  a  whole,  any  increase  in  social  dividend  may  be  loosely 
and  average-wise  declared  to  take  place  only  as  subject  to  the  law 
of  falling  marginal  service,  is  in  no  part  safely  to  be  carried  over 
into  monetary  discussion.  The  monetary  need  in  society  is  not  in 
general  better  served  by  greater  supplies  of  media ;  a  principle  of  no- 
utility  rather  than  of  diminishing  utility  applies  to  every  increase  of 
money  supply  ;  to  society  as  a  whole  or  in  the  average,  it  does  not  at 
all  matter  whether  the  level  of  prices  be  high  or  low — the  supply  of 
intermediates  great  or  small. 

Thus    while    with    gold    as    consumption    good    the    principle    of 


240  VALUE  AND  DISTRIBUTION 

of  the  uncertainty  of  life  and  by  reason  of  the  danger  of 
objective  loss,  and  all  the  demands  resting  upon  changing 
human  conditions  and  needs,  have  each  their  several  share 
in  determining  the  interest-agio  adjustment  between  demand 
and  supply. 

But  it  is  now  necessary  to  recur  to  the  fact  that  capital- 
borrowing  is  not  commonly  a  borrowing  of  instrumental 

diminishing  utility  applies,  an  entirely  different  principle  must  be 
accepted   for   the   social   significance   of   increasing   gold   as   money. 

An  increase  in  the  general  supply  of  purchasing  power  in  society, 
as  an  attempted  parallel  to  the  effect  upon  the  individual  of  an 
increase  in  his  personal  provision  of  purchasing  power,  could  point  to 
nothing  in  society  but  an  increase  in  the  total  of  goods  to  be  exchanged 
— an  increase  in  the  aggregate  demand  and  supply  of  products — and 
would  thereby  cease  to  be  a  monetary  computation,  in  any  other 
bearing  than  that  of  its  relation  to  the  quantity  of  intermediate 
purchasing   power   required   by    society. 

The  marked  inelasticity  of  the  demand  for  money,  as  compared 
with  other  market  facts,  traces  back  to  the  peculiar  nature  of  the 
service  which  it  characteristically  renders,  and  leads  in  turn  to  the 
solution  of  some  of  the  most  controversial  of  the  problems  connected 
with  monetary   theory. 

It  is  clear  enough  that  division  of  labor  is  possible  only  upon 
terms  of  the  possible  exchange  of  products.  Socially,  then,  an  inter- 
mediate of  exchange,  a  money,  has  all  the  significance  that  attaches 
to  specialization  of  activity  in  society ;  for  while  a  considerable 
degree  of  this  interdependence  by  specialization  could  be  worked  out 
under  a  system  of  barter,  it  is,  as  we  have  already  seen,  at  the  same 
time  clear  that  not  a  lack  of  any  medium  of  exchange,  but  a  multipli- 
cation of  media,  would  characterize  the  barter  economy ;  a  money 
economy  has  arrived  when  the  point  is  reached  where  one  medium  has 
come  to  be  conventionally  accepted  in  place  of  many  media. 

The  demand,  then,  for  exchange  media,  or  in  modern  society 
for  an  exchange  medium,  has  behind  it  all  the  forces  derivative  from 
the  advantages  of  specialized  industrial  organization.  For  each  indi- 
vidual the  significance  of  money  expresses  itself  in  the  advantage 
accruing  to  him  through  his  own  opportunity  to  do  the  thing  to  which 
circumstance  and  aptitude  direct  him  ;  thus  each  exchange  affords  for 
him  in  some  degree  the  advantage  commonly  designated  as  quasi-rent. 
The  strenuous  demand  for  an  exchange  medium  finds,  therefore,  its 
explanation  in  the  rent  elements  hidden  in  every  transaction  of  trade. 
Thus  all  the  advantages  that  accrue  to  individuals  separately,  and  to 
society  in  the  aggregate,  through  the  assignment  of  tasks  to  faculty 
and  to  opportunity,  and  all  the  advantages  attendant  upon  the  law  of 
increasing  return,  depend  upon  the  existence  of  an  exchange  medium, 
and  imperatively  prescribe  its  exchange-permitting  adequacy. 

And  this  leads  us  to  the  recognition  of  another  aspect  in  which 
money  differs  from  any  other  commodity ;  other  commodities  have 
many  and  varied  uses,   and   various  grades  of  utility   in   each  use ;    so 


INTEREST  241 

goods  but  of  purchasing  power ;  and  this  purchasing  power, 
as  we  have  seen,  is  directed,  under  entrepreneur  super- 
vision and  discretion,  into  all  sorts  of  gainful  avenues 
of  cost  outlay — land-labor,  industrial  appliances,  advertis- 
ing, insurance,  franchises,  privileges,  copyrights,  patent 
rights,  good-will,  cutthroat  competition,  bribery,  monopoly 
differentials    of    predation,    etc.     The    competitive    entre- 

also  of  gold  as  commodity ;  but  as  money,  all  items  perform  the  same 
function  and  perform  it  equally  well ;  gold  as  money  has  only  one 
utility  and  one  grade  of  utility.  So,  with  other  commodities,  the  total 
utility  of  the  stock  is  indefinitely  more  than  the  utility  of  the  final  item 
(if  there  ever  really  were  a  social  marginal  utility)  times  the  number 
of  items  ;  with  money  the  total  utility  is  a  simple  product. 

It  follows  also  from  the  nature  of  the  money  service  that  the 
level  of  prices  is,  for  this  purpose,  entirely  unimportant ;  and  it 
follows  likewise  that,  whatever  the  money  supply,  the  price  level  must 
adjust  itself  so  as,  in  view  of  the  volume  of  the  money  supply,  to 
make  possible  the  volume  of  exchanges  to  be  effected.  Restated,  this 
means  that,  so  far  as  production  and  the  degree  of  productive  speciali- 
zation may  be  taken  as  constants,  there  can  be  no  change  in  the 
general  price  level  otherwise  than  through  a  change  in  the  volume 
of  exchange  media.  This  statement  could  doubtless  be  equally  well 
changed  to  read  that,  with  the  supply  of  media  remaining  constant, 
changes  in  the  level  of  prices  can  come  about  only  through  a 
change  in  the  volume  of  the  demand  for  the  exchange  medium. 

No  detailed  discussion  will  be  needed  here  to  show  that  credit  as 
substitute  for  money  may  be  treated  either  as  an  increase  in  the 
supply  of  money,  or  as  a  decrease  in  the  demand  for  money.  With 
this  in  mind,  we  are  prepared  for  the  further  doctrine  that  a  direct 
proportion  holds  between  prices  and  the  volume  of  exchange  media ; 
this,  indeed,  follows  necessarily  from  the  fact  of  the  homogeneity  of 
the  demand,  and  from  the  practically  inflexible  and  inelastic  nature 
of  this  demand.  If  with  a  change  in  the  demand  for  an  exchange 
medium,  and  with  an  inelastic  supply  of  the  medium,  there  could  be 
no  adjustment  by  a  change  in  the  price  level,  the  alternative  would  be 
an  adaptation  of  the  commercial  and  industrial  organization  of 
society,  as  dictated  by  the  inadequacy  of  the  supply  of  media.  For  it 
is  once  again  to  be  noted  that  the  demand  is  none  of  it  of  a  nature  to 
be  retired  by  a  change  in  the  price  level ;  only  on  terms  of  industrial 
disorganization    and     reorganization    is    this    demand    to    be    retired. 

The  quantity  theory  of  money  runs,  at  its  crudest,  that  the 
quantity  of  money  metal  in  existence — or  in  circulation — determines 
the  price  level.  This  is  obviously  incorrect ;  and  it  probably  is  also 
incorrect,  if  the  proviso  "other  things  being  equal"  be  added.  But  the 
amended  formula  would  hold  zvere  there  no  use  for  the  money  metal 
other  than  the  money  use.  The  inadequacy  in  the  quantity  theory, 
as  commonly  stated,  is  in  its  failure  to  allow  for  the  influence  of 
demands  for  the  money  metal  other  than  the  money  demand,  or  in  its 
assumption  that  the  money  use  has  somehow  the  power  to  dictate  the 
bullion  value  in  the  non-monetary  market.     Opponents  of  the  quantity 


242  VALUE  AND  DISTRIBUTION 

preneur  concept  of  capital  is  the  only  one  having  relevancy 
here,  purely  because  individual  and  not  social  productivity 
is  the  only  productivity  in  question. 

Not  only  this:  but  the  interest  rate  is  determined  in  the 
purchase  and  sale  market  of  the  loan-fund  form  of  capital. 
All  the  different  demands  for  all  the  different  present  uses 
of  all  possible  different  kinds  of  present  goods,  and  of 
rights  to  goods,  express  themselves  as  call  for  loan  funds — 
itnspecialised  purchasing  pozver.  The  supply  of  loan  funds, 
the  origin  and  amount  of  which  yet  await  in  some  part 
their  explanation,  is  the  deferred-consumption  volume 
turned  into  immediate  and  current  purchasing  power. 

The  value  of  any  instrument  of  production  is  the 
present  zvorth  of  all  the  future  incomes  attributed  to  it,  as 
computed  under  the  time-discount  rate  established  in  the 
loan-fund  market.^ 

theory  are  also  prone  to  forget  that  there  are  two  distinct  demands — 
the  money  and  the  commodity  demand,  and  to  assume  that  the  money 
value  is  a  derivative  from  the  value  of  the  metal  as  established  in 
the  commodity  market.  But,  in  truth,  both  the  industrial  demand  and 
the  money  demand  concur  in  fixing  the  value  which,  supply  being 
assumed,  the  money  metal  must  bear.  But  it  is  none  the  less  true  that 
so  much  as  is  the  exchange  medium  less  so  much  the  more  must  the 
exchange  unit  possess  of  purchasing  power — that  is,  that  so  much 
the  lower  must  be  the  price  level.  The  quantity  theory  is  then  tenable 
in  its  assertion  of  proportionality,  but  fallacious  in  its  tracing  of  the 
lines  of  causation. 

There  is,  indeed,  no  warrant  for  believing  that  gold  as  money  gets 
its  value  from  gold  as  commodity — or  the  reverse.  The  value  of  iron 
for  nails  is  not  reflected  to  it  from  the  stove  demand,  any  more  than 
the  value  of  flour  for  pie-crust  purposes  is  the  determinant  of  the  value 
of  flour  in  all  other  culinary  processes.  In  no  intelligible  sense,  then, 
can  the  volume  of  money  in  any  one  country,  or  in  the  world,  be  said  to 
fix  prices,  or  prices  be  said  to  fix  the  volume  of  money ;  but  both 
the  level  of  prices  and  the  local  quantity  of  money  are  determined  by 
the  same  influences,  that  is,  are  derivative  from  the  world-level  of  the 
value  of  gold,  as  itself  expressive  of  the  adjustment  between  all  the 
different  demands  for  gold,  on  the  one  side,  as  over  against  all 
the  supply  of  gold  on  the  other  side  ;  and  by  virtue  of  this  common 
derivation,  the  value  of  gold  used  as  money  and  the  volume  of  gold 
so  used  are  bound  rigidly  together. 

^  Professor  Irving  Fisher's  admirable  treatise  upon  The  Rate  of 
Interest  appears  as  the  present  work  is  passing  through  the  press. 

It  will  be  remembered  that  Boehm-Bawerk  defines  interest  as  the 
premium     commanded    by    present    over    future    goods,    and    that    he 


INTEREST  243 

No  instrumental  good — or,  if  one  prefers  the  expres- 
sion, no  capital  good — will  be  produced,  unless  the  future 

attributes  this  premium  to  three  concurrent  causes,  (i)  the  per- 
spective underestimate  of  the  future,  (2)  a  possible  relative  scarcity 
of  present  goods  as  compared  with  future  goods,  (3)  the  technological 
productivity   of  wealth   with   passing   time. 

Professor  Fisher — following  what  is  seemingly  Professor  Fetter's 
view — ^adopts  as  his  thesis  that  only  the  first  two  of  the  three  influences 
set  up  by  Boehm-Bawerk  are  properly  to  be  invoked  in  explanation  of 
the  interest  phenomenon : 

"It  is  the  third  circumstance — the  so-called  technical  superiority 
of  present  over  future  goods — which  we  believe  to  contain  essential 
error  (p.  55),  To  abstract  both  the  underestimate  of  the  future  and 
underprovision  for  the  present  is  to  abstract  the  tvhole  basis  of 
interest  (p.  55).  If  we  eliminate  the  'other  two  circum- 
stances' ....  we  eliminate  entirely  the  superiority  of  present 
over  future  goods,  and  the  supposed  third  circumstance  of  'technical 
superiority'  therefore  turns  out  to  be  non-existent  (p.  70). 
If  we  cast  out  from  the  agio  theory  Boehm-Bawerk's  special  feature, 
his  alleged  'technical  superiority  of  present  goods,'  the  theory 
which  remains  is  believed  to  be  correct"    (p.   74). 

Professor  Fisher  is  not,  however,  disposed  to  deny  to  productivity 
some  bearing  on  the  interest  rate  ;  but  he  insists  that  the  influence  of 
productivity  is  exerted  solely  through  modifying  the  general  situation 
within  which  postponement  of  consumption  takes  place  ;  it  brings  about, 
that  is,  a  new  abstinence  problem,  and  does  this  solely  through  modi- 
fying the  relative  supplies  of  present  goods  as  over  against  future 
goods : 

"It  is  also  true,  as  Boehm-Bawerk  has  pointed  out,  that  not  only 
does  a  lower  rate  of  interest  tend  to  the  choice  of  remoter  returns, 
but  that,  contrariwise,  the  choice  of  remoter  returns  tends  to  check 
the  fall  in  the  rate  of  interest ;  the  reason  ....  being  that  the 
choice  of  an  income-stream  relatively  large  in  the  future  and  small  in 
the  present  tends  to  increase  the  relative  valuation  of  present  as 
compared  with  future  income   (p.   164). 

"If  any  cause  tends  to  lower  the  rate  of  interest,  the  immediate 
effect   will  be  to   put   a   premium   on  those   income-streams   the   return 

from    which    is    in    the    remote    future But    the    decision    to 

choose  such  income-streams  tends  to  prevent  the  very  fall  in  the  rate 
of  interest  which  caused  the  choice.  For  by  relatively  oversupplying 
the  future  with  income,  and  undersupplying  the  present,  such  uses 
as  forestry  will  tend  to  raise  the  relative  valuation  of  present  over 
future     income,     and     therefore     also     to     raise    the     rate    of    interest 

(p.   175). 

"Nature  offers  man,  as  one  of  her  optional  income-streams,  the 
possibility  of  great  future  abundance  at  trifling  present  sacrifice. 
This  option  acts  as  a  bribe  to  man  to  sacrifice  present  income  for 
future,  and  this  tends  to  make  present  income  scarce  and  future 
income  abundant,  and  hence  also  to  create  in  his  mind  a  preference 
for  a  unit  of  present  over  a  unit  of  future  income  (p.  186). 

"The    effect    in    raising    interest    comes    merely    from    the    shifting 


244  VALUE  AND  DISTRIBUTION 

rents  promised  by  it,  when  computed  into  present  worth 
at  the  market  rate  of  discount,  equal,  and  thereby  justify, 

forward  of  the  income-stream,  which  leaves  the  immediate  income 
smaller  than  before,  but  compensates  for  this  by  a  still  greater  increase 

afterwards The    rate    of    interest,     for    contracts    connecting 

the  periods  of  scarce  income  with  those  of  plentiful  income,  tends  so  to 
be  high   (p.   199). 

"The  deferred  increase  is  expected  to  yield  a  return  on  the 
immediate  sacrifice  at  a  rate  sometimes  far  greater  than  the  rate  of 
interest.  But  this  high  rate  of  return  on  sacrifice  to  the  exploiter  of 
the  newly  discovered  method  of  utilizing  capital  does  not  by  itself 
fix  the  rate  of  interest  at  that  level.  On  the  contrary,  the  valuation 
of  the  property  is  immediately  adjusted  to  the  new  conditions" 
(p.   199). 

Thus  we  are  to  understand  Fisher  to  assert  that  the  use  of  any 
productive  process  or  the  use  of  any  sort  of  productive  wealth  can 
exert  an  effect  upon  the  rate  of  interest  only  through  modifying  the 
individual's  estimate  of  the  relative  importance  to  him  of  present 
goods  as  against  future  goods.  How  shall  the  owner  of  an  instrument 
of  production,  say,  a  farm,  employ  it — for  farming?  for  forestry?  for 
mining? 

"In  the  case  of  optional  income-streams,  the  particular  choice 
depends  upon  the  rate  of  interest  (p.  145).  The  intensiveness  of 
his  farming  is  thus  determined  by  the  rate  of  interest  (p.  157).  The 
choice  will  fall  on  the  option  whose  marginal  rate  of  return  on  sacri- 
fice, reckoned  relatively  to  the  neighboring  option,  is  equal  to  the  rate 
of  interest  (p.  158).  Those  investments  which  most  promptly  yield 
returns  are  formed  first,  and  the  less  rapidly  returning  instruments 
are  successively  formed  until  the  margin  is  reached  which  corre- 
sponds to  the  rate  of  interest A  certain  decrease  of  present 

income  will  be  accompanied  by  a  certain  increase  in  future  income. 
The  relation  between  the  immediate  decrease  and  the  future  increase 
will  vary  within  a  wide  range,  wherein  the  choice  will  fall  at  the 
point  corresponding  to  the  ruling  rate  of  interest  (p.  159).  The 
intensity  with  which  he  will  improve  and  cultivate  his  land  is  deter- 
mined by   the  current  rate  of   interest"    (p.    161). 

That  this  correctly  sets  forth  the  attitude  and  the  computations  of 
the  individual  operator  is  past  question  ;  but  is  there  not  at  the  same 
time  some  influence  exerted  to  modify  the  rate  of  interest — and,  if 
so,  how?  Does  each  productive  instrument  merely  receive  its  value 
from  an  interest  rate  elsewhere  and  otherwise  determined  ? 
Or  do  productive  instruments  themselves,  as  an  aggregate, 
through  the  very  fact  of  the  productive  opportunities  which  they 
off'er,  have  an  effect  in  determining  that  interest  rate  under  which 
each  is  separately  capitalized?  And  do  new  processes,  inventions, 
and   appliances   somehow  bear  to   affect   the  rate? 

"All  preference  for  present  over  future  goods  resolves  itself, 
in  the  last  anaysis,  into  a  preference  for  early  enjoyable  income  over 
late  enjoyable  income  (p.  90).  When  any  other  goods  than  enjoy- 
able income  are  considered,  their  values  already  imply  a  rate  of  inter- 
est.    When    we    say   that    interest   is   the   premium    on   the   value    of   a 


INTEREST  245 

the  requisite  investment  of  present  purchasing  power. 
And  likewise,  as  will  be  readily  seen,  any  existing  instru- 

present  house  over  that  of  a   future   house,   we  are  apt  to   forget  that 

the  value  of  each  house  is  itself  based  on  a  rate  of  interest 

Both    terms   of   the    comparison   involve    the    rate    of   interest 

But  when  present  ultimate  income  is  compared  with  future  ultimate 
income,  the  case  is  different,  for  the  value  of  ultimate  income  involves 
no  interest  whatever  (p.  91). 

"The   rate  of  interest   expresses  a   price   in  the   exchaoge  between 

present  and  future  goods Time-preference  is  the   central   fact 

in  the  theory  of  interest"   (p.  88). 

True,  "not  only  does  a  lower  rate  of  interest  tend  to  the  choice 
of  remoter  returns,  but,  contrariwise,  the  choice  of  remoter  returns 
tends  to  check  the  fall  in  the  rate  of  interest"  but  the  reason  is 
stated  as  being  "that  the  choice  of  an  income-stream  relatively  large 
in  the  future  and  small  in  the  present  tends  to  increase  the  relative 
valuation  of  present  as  compared  with  future  income"  (p.  164). 

Here,  then,  is  the  issue :  Fisher  does  not  dispute  the  doctrine  of 
Boehm-Bawerk  that  the  newly  opened  lands,  newly  invented  appli- 
ances, newly  devised  methods,  have  a  bearing  to  raise  the  rate  of 
interest,  but  only  that  the  productivity  fact  is  a  separate  and  inde- 
pendent cause  of  interest ;  he  ascribes  the  influence  of  productivity 
solely  to  its  effect  upon  the  relative  importance  attached  to  present 
and  future  goods.  Larger  opportunities  for  profitable  investment 
are  presented  as  having  ultimate  bearing  upon  the  rate,  not  by  using 
up  the  supplies  of  capital  or  by  increasing  the  volume  of  the  demand 
for  capital,  but  solely  by  limiting  the  present  supplies  of  consumption 
goods  at  the  same  time  with  increasing  the  supplies  of  future  goods, — 
and  thereby  increasing  the  premium  of  present  goods  over  future 
goods : 

"The  lower  the  rate  of  interest,  the  better  can  the  owner  afford 
to  keep  his  carriage  in  repair,  and  the  higher  the  state  of  efficiency  in 

which    it    and    all    other    instruments    will    be    kept The    very 

attempt  ....  tends  in  turn  to  increase  the  rate  of  interest ;  for 
every  repair  means  a  reduction  in  present  income  for  the  sake  of 
future — a  shifting  forward  in  time  of  the  income-stream — and  this 
will  cause  a  rise  in  the  rate  of  interest  (p.   195). 

"The  effect  in  raising  interest  comes  merely  from  the  shifting 
forward  of  the  income  stream,  which  leaves  the  immediate  income 
smaller    than    before,    but    compensates    for    this   by    a    greater    income 

afterwards The  high  rate  of  return  on  sacrifice  to  the  exploiter 

of  the  newly  discovered  method  of  utilizing  capital  does  not  by  itself 
fix  the  rate  of  interest  at  that  level.  On  the  contrary,  the  valuation 
of  the  property  is  immediately  adjusted  to  the  new  conditions 
(p.   199). 

"Since  the  invention  will  more  than  repay  this  cost  .... 
the  effect  will  be  to  decrease  immediate  and  increase  remote  income 
for  society  as  a  whole.  Borrowing  and  lending  merely  distribute  the 
pressure  upon  those  most  willing  to  bear  it ;  but  the  effect  is  ....  to 
cause   a   temporary   depression    followed   by   an    ascent   in    the    income- 


246  VALUE  AND  DISTRIBUTION 

merit,  whether  land  or  other,  the  upkeep  of  which  costs 
more  in  newly  invested  or  in  reinvested  purchasing  power 

stream,    and    therefore    to    increase    somewhat   the    rate    of   time-prefer- 
ence and  the  rate  of  interest  (p.  200). 

"Society  ....  directs  its  labor  to  great  engineering  enter- 
prises ....  which  cannot  be  in  to  contribute  a  return  in  enjoyable 
income  for  many  years.  In  contemplation,  future  income,  during  this 
period,  is  relatively  plentiful,  and  in  consequence  of  these  'great 
expectations,'  the  rate  of  interest  will  be  high"  (p  203). 

There  is,  then,  it  will  be  noted,  no  denial  made  by  Fisher  that  the 
productivity  of  wealth  has  an  effect  upon  interest  rates — that  it  is 
a  cause — but  only  a  denial  that  it  is  a  separate  and  independent 
cause.  The  issue  is,  then,  only  as  to  the  sense  in  which  it  is  a  cause, 
and  as  to  the  method  of  its  action :  if  one  shifts  a  weight  from  one 
side  of  the  scales  to  the  other,  the  tipping  of  the  scales  may  certainly 
be  said  to  be  caused  by  the  shifting  of  the  weight, — but  it  may  also  be 
rightly  asserted  that  this  is  only  through  the  disturbance  of  the  rela- 
tion between  the  two  weights.  And  by  reasoning  precisely  parallel 
it  has  been  said  that  a  new  supply  of  any  commodity  has  no  effect 
vipon  price,  simply  because — once  the  supply  is  present — the  adjust- 
ment becomes  purely  a  matter  of  the  nature  and  volume  of  the 
demand. 

If  this,  then,  is  really  the  issue,  one  might  stop  to  ask  himself, 
what  of  it — ^supposing  it  all  to  be  true ;  is  the  issue  really  worth 
while? 

But  is  it  all,  indeed,  true?  Could  not  the  reproductive  power  of 
wealth  establish  an  interest  rate  even  "if  we  eliminate  the  other 
two  circumstances"?  After  all,  is  "the  supposed  third  circumstance 
nom-existent"  ?  Is  it  true  that  "the  imagined:  third  circum- 
stance   ....    is    only   the  first   two    circumstances   in   disguise"  ? 

Surely,  (i)  the  perspective  underestimate  of  the  future  may 
suffice  to  place  a  premium  on  present  goods:  and  surely  also  (2)  the 
relative  scarcity  of  present  goods  as  compared  with  future  goods 
would  also  equally  well  suffice  to  bring  about  this  premium  :  but  how 
about  the  reproductive  power  of  capitalistic  processes  as  an  inde- 
pendent cause  ? 

Let  it  be  assumed,  as  an  extreme  test  case,  that  present  needs 
and  desires  are  so  far  weak  or  so  far  satiated  as  to  approach  the  limit  of 
non-existence  or  of  disappearance, — a  situation  in  which,  by  the  very 
terms  of  the  assumption,  there  can  be  neither  any  "prospective  under- 
estimate" of  the  future,  nor  any  degree  of  inadequacy  in  "present  pro- 
vision,"— there  being  in  fact  no  desire  for  present  consumables,  but 
only  a  clear  appreciation  of  the  certainty  of  tomorrow's  need.  If  now 
it  be  clear  that,  for  each  unit  of  the  existing  wealth  of  today,  there 
may  by  tomorrow  be  derived  two  units  for  tomorrow's  consumption, — 
is  it  not  certain  that  there  will  forthwith  set  in  a  vigorous  competitive 
bidding  for  control  of  the  present  facts  offering  a  command  of 
tomorrow's  consumable  goods,  and  that  there  must  result  an  interest 
rate  approximating  to   100  per  cent,  per  day? 

It    is    extremely   difficult    to    decide    how    far    and    in    what    sense 


INTEREST  247 

than  the  present  worth  of  the  future  increased  returns 
which  are  attributable   to  the  upkeep  to  be   applied,  will 

Fisher  concurs  in  Boehm-Bawerk's  assumption  that  comparison  is 
possible  in  competitive  society  between  goods  in  the  present  and 
goods  in  the  future.  Most  of  Fisher's  analysis  proceeds  upon  the  implied 
assumption  of  this  possibility :  "Could  it  always  be  assumed  that  the 
monetary  standard  was  invariable  in  value  with  reference  to  all 
goods,  the  rate  of  interest  reckoned  in  money  would  be  the  same 
as  though  it  were  reckoned  in  terms  of  the  goods  themselves" 
(p.  78).  But  even  were  it  accepted  that  the  comparison  is  possible, 
Professor  Clark  long  ago  made  it  clear  that  in  the  market  transactions 
of  a  competitive  society  the  comparison  does  not  actually  take  place. 
And  it  is  equally  clear  also  that  neither  borrowing  nor  paying  com- 
monly takes  place  in  terms  of  any  concrete  goods — whether  farms  or 
machines  or  raw  materials  or  consumables.  The  borrowing  runs  in 
terms  of  present  purchasing  power  according  to  the  established  money 
standard  ;  and  the  future  settlement  is  agreed  to  be  worked  out  in  like 
tenns.  The  contract  and  all  the  operations  under  it  sound  purely  in 
terms  of  price,  precisely  as  the  gain  in  contemplation  by  the  entre- 
preneur is  computed  as  nothing  else  than  a  balance  in  terms  of 
price.  And  no  other  computation  is  of  the  slightest  significance  to 
him — unless,  possibly,  as  somehow  derivative  from  the  price  gain 
which  he  is  engaged  in  seeking.  The  interest  problem  is,  then,  hot  one 
of  surplus  value,  or  of  surplus  consumption  goods,  or  of  surplus 
future  income,  but  only  of  surplus  price.  Only  so  far  as  surplus 
goods  bring  surplus  price  can  surplus  product  of  any  sort  stand  as 
relevant  to  the  computation. 

For  the  purposes  of  the  interest  problem,  therefore,  anything  is 
productive  which,  in  the  actual  situation  of  the  entrepreneur,  makes 
for  a  price-increment  for  him.  The  computation  has  to  do  solely 
with  productivity  as  interpreted  from  the  individual-acquisitive  point 
of  view.  The  borrowing  is  of  a  fund  of  purchasing  power.  This 
purchasing  power  may,  truly,  be  directed  into  machinery,  farms,  or 
raw  materials, — into  lines,  that  is  to  say,  of  technological  and 
social  productivity, — but  so,  equally  well,  may  it  not.  Instead, 
it  may  go  into  buying  the  right  to  levy  taxes,  or  to  enjoy  a 
monopoly,  or  otherwise  to  plunder  society ;  or  the  borrowed  fund 
may  be  invested  in  bribing  the  city  council  to  grant  a  desirable 
franchise, — or  into  advertising  expenditure,  as  a  process  of  indoctrinating 
the  public  with  profit-rendering  Hop-Bitters  or  Peruna  misinformation. 
In  any  case,  if  the  adventure  promise  a  return  in  price-increment,  it 
will  contribute  to  the  demand  for  loanable  funds,  and,  as  based  upon  it, 
there  may  emerge  an  interest  rate. 

And  from  aspects  of  distributive  theory  mostly  to  be  presented 
later  (see  chap,  xxvi),  something  may  now  be  deduced  for  the  pur- 
poses of  the  interest  problem.  Even  where  the  borrowed  funds  are 
used  by  the  entrepreneur  in  the  purchase  or  hire  of  instruments  of 
production,  his  problem  remains  precisely  the  same  problem  of  how  to 
get  out  of  the  future  price-result  a  price  balance  over  the  price  outlay. 
Enough  of  purchasing  power  must  be  advanced  for  labor  to  divert  it 
from  ministry  to  other  demands — whether  the  consumption  demand 
or  the  demand  of  some  competitor, — enough  for  machines  to  get  them 


248  VALUE  AND  DISTRIBUTION 

fail  of  receiving  the  upkeep :"    The  degree  of  improvement 
depends  upon  the  rate  of  interest. 

And  now  what  shall  be  said  of  the  view  especially 
championed  by  Wieser,  that  for  a  complete  theory  of  inter- 
produced  for  the  purpose, — and  enough  for  land  to  command  its 
service  ;  and  in  connection  with  this  investment  there  goes  the  entre- 
preneur's own  activity  of  supervision  and  co-operation.  When  the 
time  arrives  for  computing  the  gains  upon  the  adventure,  there  is  no 
way  of  attributing  a  certain  quantum  or  proportion  of  the  price  result 
to  the  labor  hired,  or  to  the  funds  advanced  for  the  labor,  or  any 
certain  other  amount  to  the  machinery  hired,  or  any  third  amount  to 
the  land  employed  ;  nor  is  it  possible  even  to  attribute  any  certain  sum 
of  acquisitive  productivity  to  the  aggregate  of  the  borrowed  funds. 
All  that  the  entrepreneur  can  know  is  that  by  employing  the  borrowed 
■  funds  or  their  proceeds  in  connection  with  his  own  activity,  and 
very  possibly  also  in  connection  with  funds  or  instruments  of  his 
own,  this  new  borrowing  could  be  made  so  to  signify  to  him  in  terms 
of  price-increment  as  to  justify  the  promise  to  pay  a  price-interest 
increment.  The  rate  of  time  discount,  therefore,  is  a  rate  fixed  and 
determined  in  the  loan-fund  market ;  all  properties — instrumental 
or  other — that  command  a  hire  receive  a  value  through  the  applica- 
tion of  this  interest  rate  to  the  computation  of  the  present  worth  of 
these  hires. 

"  Classical  doctrine  teaches  that  the  payment  of  land  rent  does 
not  condition  the  existence  or  the  maintenance  of  the  land  as  pro- 
dtictive  instrument ;  the  rental  payment  having  thus  no  bearing  upon 
the  supply  of  instruments,  can  have  no  significance  for  the  supply  of 
products,  and  thus  no  significance  for  the  value  of  those  products ; 
rent  is  thus  held  to  be  a  price-determined  fact — a  result  rather  than  a 
cause, — a  distributive  share  which  is  not  at  the  same  time  a  cost,  in 
that  sense  in  which  the  other  distributive  shares  are  costs. 

Marshall  faced  and  accepted  the  logically  necessary  inference 
that  no  hire  of  any  produced  instrument  of  production  can  be  regarded 
as  a  price-determining  cost,  excepting  under  a  time  computation  long 
enough  to  allow  a  change  to  take  place  in  the  supply  of  instnunents, 
as  the  result  of  the  divergence  of  compensation  from  cost ;  and  that 
for  short  periods  capital-goods  rents  must  be  treated  as,  for  cost  pur- 
poses,   exactly   like   land    rents. 

We  are  not  just  now  called  upon  either  to  accept  or  to  reject  this 
view,  but  only  to  examine  the  relations  of  land  instruments  and  rental 
outlays  to  problems  in  the  shifting  and  incidence  of  taxation. 

It  is  clear  that  a  tax  shifts  only  so  far  as,  by  the  imposition  of  the 
tax, — through  its  effect  upon  the  relative  supply  of  instruments,  the 
relative  costs  of  production,  and  the  relative  volumes  of  products 
exchanging  against  one  another, — modifications  are  necessitated  in  the 
exchange  relations  in  the  market ;  shifting  is  a  problem  in  value. 

If,  for  example,  certain  kinds  of  productive  instruments  are  taxed, 
or  if  capital  investments  in  a  certain  line  of  production  are  taxed,  a 
change  in  the  supply  of  these  instruments,  or  in  the  volume  of  capital 
investment,  will  be  brought  about ;  the  redistribution  of  capital  applica- 
tions may  be  slow  or  may  be  rapid,  according  to  the  degree  of  mobility 


INTEREST  249 

est  there  is  necessitated  an  investigation  of  the  distribu- 
tion-imputation process  under  which  the  rate  of  interest, 
together  with  all  the  other  distributive  shares  accruing 
under  the  productive  process,  is  supposed  to  be  determined  ? 

in  the  particular  case ;  even  if  the  instrument  or  other  capital  have  no 
alternative  application  by  immediate  change  of  use,  it  is  certain  that 
with  time,  through  the  gradual  process  of  wear-out  and  deprival  of 
upkeep,  the  capital  shifting  is  none  the  less  inevitable ;  the  supply  of 
products  must  diminish  with  the  progressive  diminution  in  the  supply 
of  instruments ;  the  result  must  express  itself  in  an  enhancement  of 
price  to  consumers. 

As  to  land,  the  traditionally  accepted  doctrine  is  excellently  set 
forth  by  Carver  in  the  following :  "All  goods  excepting  land  are 
perishable  and  reproducible  while  land  is  not  ....  an  important  dis- 
tinction, since  this  limits  their  value  to  something  approximating  their 
cost  of  production,  whereas  there  is  no  such  limit  to  the  value  of 
land.     These   distinctions  are  important  because   important   conclusions 

as-  to  public  policy  depend  upon  them A  tax  on  land,  to  take 

a  single  example,  has  a  different  effect  from  a  tax  on  an  article  which 
is  being  produced,  worn  out,  and  reproduced  by  human  effort.  A  tax 
on  the  latter  class  of  articles  has  the  effect  of  discouraging  that  effort 
and,  consequently,  of  reducing  the  supply,  whereas  a  tax  on  land  does 
not  affect  the  supply  in  the  same  way  nor  to  the  same  degree." — Dis- 
tribution, p.  129. 

It  is,  however,  clear  enough  that,  if  land  values  are  subjected  to  a 
higher  rate  of  tax  than  are  other  investments  in  productive  instru- 
ments, a  shifting  of  investment  will  take  place  as  soon  and  as  far  as  the 
nature  of  the  case  leaves  it  possible.  The  only  questions  are  as  to  how 
soon  and  how  far  this  possibility  can  manifest  itself.  It  is  clear  also 
that  in  fertility  aspects  the  original  environment  is  capable  of  exhaus- 
tion in  full  parallel  with  produced  instruments  of  production,  and  by 
the  same  method  if  upkeep  is  withheld.  Practically  all  agricultural 
districts  in  New  England  testify  to  this  fact ;  nothing  about  land  is 
indestructible  excepting  its  location. 

It  is  apparent,  then,  that  the  "Single  Taxers"  have  been  grievously 
misled  through  an  uncritical  acceptance  of  the  classical  rent  theory. 
They  make  shipwreck  against  the  certainty  that  to  subject  the  unearned 
increment  to  their  tax  program  is  inevitably  to  drive  this  unearned 
increment  out  of  existence,  or,  more  accurately,  to  force  its  transfer 
into  a  non-land  form  of  holding — to  render  food  and  raw  materials 
dear  through  the  diminution  of  the  social  equipment  for  the  supply  of 
these  goods. 

But  while,  as  applied  to  fertility  differentials,  all  this  appears  to 
be  past  doubt,  the  argument  as  it  applies  to  the  mere  fact  of  location, 
and  to  differentials  of  transportation,  is  not  quite  so  satisfactory  or  so 
self-approving. 

The  truth  is  however,  that  unless  fertility  and  location  differentials 
are  separately  appraised  and  separately  burdened  in  point  of  taxation, 
the  tax  upon  location  will  have  precisely  the  same  effect  to  stimulate 
the  exhaustion  of  fertility  as  if  the  tax  were  directly  imposed  upon  the 
fertility.  The  land  stands  as  a  value  aggregate  of  fertility  and  of 
transportation  differentials  ;  value  will  continue  to  be  substracted  from 


250  VALUE  AND  DISTRIBUTION 

Or  what  shall  be  said  as  to  the  proposition — perhaps 
commonly  regarded  as  identical  with  the  foregoing,  and  pos- 
sibly rather  intended  by  Wieser, — that  a  complete  interest 
theory  requires  an  investigation  and  elucidation  of  the 
distribution-imputation  process  under  which  the  rentals  and 
hires  of  the  various  classes  of  instrumental  goods  and 
agents  are  determined? 

The  replies  must  be  as  follows :  for  all  co-operating — 
that  is,  complementary — production  facts,  whether  ma- 
chines of  various  sorts,  laborers  of  various  grades  and 
kinds,  lands  of  differing  capacities  and  adaptations,  patents, 
franchises,  trade  secrets — all  such  items  as  enter  for  the 
individual  advantageously  into  the  productive  process, 
whether  the  product  be  hats,  or  shoes,  or  bonds,  or  salable 
notoriety,  or  marketable  slander,  or  office,  or  place,  or  influ- 
ence, or  pictures,  or  acting,  or  preaching,  for  all  of  these 
gain-producing  agencies  there  is  everywhere  the  problem 
of  the  value  distribution  of  the  joint  product — a  problem 
too  difficult  to  be  entered  upon  here ;  but  this  is  not  the 
interest  problem;  it  is  the  problem  of  rentals,  hires,  and 
wages,  whenever  paid,  and  without  necessary  reference  to 
their  possible  reduction  into  a  present  worth. 

Confining  ourselves  for  the  present  to  the  observation 
that  all  of  these  rentals  facts,  if  not  of  present  payment, 
are  themselves  subject  to  the  discount  rendering  into  pres- 
ent worth,  we  turn  to  what  is,  for  immediate  purposes,  the 
surpassingly  important  fact,  that  all  these  rentings,  and 
hirings,  and  purchasings  of  instruments,  or  of  labor,  or  of 
any  possible  sort  of  cost  fact,  enter  into  the  cost  computa- 
tion of  the  entrepreneur  solely  under  the  capital  denomi- 

the  land  up  to  the  limit  that  the  "skinning"  process  can  be  carried — 
so  long,  that  is,  as  by  wear-out  and  refusal  of  upkeep,  the  slow  market- 
ing of  the  land  by  the  process  of  exhaustion  remains  possible  of  further 
extension.  Where,  as  with  urban  values,  the  land  differential  is  entirely 
one  of  location,  there  is  no  serious  theoretical  impossibility  in  the 
single-tax  program,  if  only  the  distinction  between  ground  rent  and 
improvement  rent  is  faithfully  observed.  For  precisely  parallel  reasons, 
it  is  imperative  with  agricultural  land  to  preserve  the  distinction 
between  differentials  of  location  and  differentials  of  fertility. 


INTEREST  251 

nator ;  but  they  nevertheless  enter  in  two  aspects :  ( i )  ac- 
cording to  the  quantum  of  direct  expense;  (2)  according  to 
the  tune  at  which  the  expenditure  is  made  relatively  to  the 
time  of  cash  marketing.  And  this  amounts  to  saying  that 
so  far  as  the  expenses  of  production  are  technological  in 
character  and  are  to  be  ascribed  to  the  mechanical  factors 
in  production,  these  expenses  as  capital  charges  are  to  be 
computed  not  in  terms  of  rent,  interest,  wages,  and  profits, 
but  of  (i)  instrument  hires — rentals,  (2)  wages,  (3) 
profits,  and  (4)  time  discount,  interest,  upon  the  particular 
outlays  under  consideration.  But  it  is  still  to  be  kept  in 
mind  that  these  categories  of  cost,  like  the  discarded  cate- 
gories, fall  far  short  of  including  all  cost  outlays ;  and 
upon  each  of  these  other  outlays,  there  is,  or  may  be,  an 
interest  charge  to  compute  as  within  the  total  of  entrepre- 
neur-capital cost. 

For  Crusoe  the  problem  of  balancing  the  protest  against 
postponement  of  consumption  against  the  advantages 
obtainable  through  postponement,  could  offer  no  great 
theoretical  difficulty ;  the  pressure  of  present  desire  must 
find  in  varying  degree  its  justification  or  explanation,  (i)  in 
the  prospect  of  relative  plenty  or  want;  (2)  in  the  uncer- 
tainty of  life;  (3)  in  the  prospect  of  greater  or  less  inten- 
sity of  life  and  desire,  with  the  passing  of  the  years;  (4)  in 
the  sheer  lack  of  capacity  adequately  to  appreciate  in  the 
present  the  needs  of  the  future — all  these  influences  sum- 
ming up  to  explain  the  relative  estimate  of  present  need  to 
future  need.  On  the  objective  side,  there  are  the  prospects 
and  openings  for  productive  employment,  and  the  hazards 
of  partial  loss  or  total  loss.  The  limit  upon  saving  is  at  the 
point  where  advantages  and  disadvantages  are  regarded  as 
at  equilibrium. 

In  competitive  society,  the  holder  of  wealth  or  of  rights 
to  wealth  or  of  rights  to  service  has  not  merely  the  three 
options  open  to  Crusoe,  to  exploit,  to  hold,  to  consume;  he 
has  a   fourth  possibility,  to  lend ;  and   from  his  personal 


252  VALUE  AND  DISTRIBUTION 

point  of  view,  only  the  third  option  is  to  be  regarded  as 
non-productive;  all  the  rest  are  productive  ways  of  holding 
present  wealth  over  for  acquisitive  ends.  Whichever  one 
of  these  three  productive  methods  offers  the  highest  induce- 
ments will  be  selected,  provided  only  that  it  is  of  sufficient 
weight  to  overbalance  the  claims  of  immediate  consump- 
tion. 

On  the  side  of  borrowers  a  provision  of  present  wealth 
or  of  present  purchasing  power  may  be  desired  either  for 
purposes  of  consumption  or  of  some  sort  of  gainful  employ- 
ment of  the  borrowed  fact.  But  for  both  borrowers  and 
lenders,  the  problem,  while  worked  out  in  terms  of  stand- 
ard and  of  price,  is  in  ultimate  analysis  a  calculation  of 
present  utility  against  future  utility :  from  no  point  of  view 
is  it,  in  any  other  sense  than  this  price  sense,  a  problem  of 
value.  The  borrower,  as  producing  entrepreneur,  can  pay 
an  increase,  reckoned  in  the  price  standard,  if,  by  the  aid 
of  the  loan,  he  can  become  able  to  put  upon  the  market 
goods  salable  at  an  increase  of  price  over  what  his  product 
without  the  loan  would  have  sold  for ;  he  cannot  have  the 
present  purchasing  power,  or  present  wealth  in  terms  of 
purchasing  power,  unless  upon  terms  of  this  payment.  The 
problem  as  thus  restated  is,  then,  precisely  like  any  other 
problem  of  market  price  where  buyers  and  sellers  are  many 
on  both  sides  of  the  market,  only  that  in  the  interest  prob- 
lem the  point  of  price  adjustment — the  equilibrium  point — 
is  a  rate  per  cent.  Detailed  analysis  of  the  process  by 
which  this,  or  any  other,  price  adjustment  is  reached,  must 
be  postponed  to  a  later  chapter  (see  chap.  xxv). 

But  there  still  remains  the  difficulty  of  formulating  the 
precise  relation  of  technological  productivity  to  the  interest 
rate. 

It  has  become  sufficiently  evident  that  technological  pro- 
ductivity would  alone  suffice  to  explain  the  time-discount 
phenomenon ;  but  so  might  also  the  "perspective"  fact  be 
sufficient,  if  only  the  demand  for  present  consumption  out- 


INTEREST  253 

ran  the  loan  supplies  derivative  from  the  reverse  per- 
spective. 

But,  in  point  of  fact,  the  saved  purchasing  power  in 
society  goes  not  solely  to  supply  the  entrepreneur  demand ; 
it  directs  itself  sometimes  into  the  immediate  substituted 
consumption  of  the  borrower;  or  results  in  the  borrower's 
providing  himself  with  increased  durable  consumption 
goods ;  or,  again,  in  the  financing  of  public  improvements, 
or  of  deficits  of  administration;  or,  still  again,  in  indebted- 
ness for  the  wastes  and  orgies  of  war. 

And  even  when  the  demand  in  question  is  an 
entrepreneur  demand  for  entrepreneur  capital,  there 
is  no  warrant  for  supposing  that  in  any  case, 
all,  or,  in  all  cases,  any  of  the  borrowed  funds 
must  be  devoted  to  the  increase  or  even  to  the  upkeep 
of  instrumental  goods.  The  quest  of  the  entrepreneur  is 
purely  one  of  private  gain;  his  ends  may,  it  is  true,  be 
attained  through  socially  productive  activity,  by  contribu- 
tion to  the  social  dividend,  but  equally  truly,  and  equally 
commonly,  these  ends  are  otherwise  sought.  Private  acqui- 
sition is  the  only  productivity  involved.  Merchandising  of 
consumption  goods  is  clearly  enough,  in  present  society,  a 
socially  productive  activity,  irrespective  of  all  question  of 
the  degree  of  the  productivity  or  of  the  possibly  associated 
wastes ;  but  it  is  not  so  clear  that  either  the  production  or 
the  underwriting  or  the  merchandising  of  every  sort  of 
corporate  stocks  is  as  socially  productive  as  it  may  be 
acquisitively  gainful.  So  the  uprearing  of  business  good- 
will through  advertising,  and  the  establishment  of  monopoly 
through  the  outlays  and  the  temporary  losses  of  cutthroat 
competition,  are  gainful  investments  of  loan-fund  capital. 
So  the  right  to  levy  tolls  is  a  capitalizable  fact,  and  may  be 
originally  procured  on  terms  of  capital  outlay.  Interest 
rates  may  be  in  part  supported,  and  might  be  entirely  so, 
by  the  investment  opportunity  ofifered  under  the  system  of 
tax-farming,  or  by  the  sale  of  monopolies  in  foreign  trade. 
Election  contributions  are  often  decided  to  be  a  profitable 


254  VALUE  AND  DISTRIBUTION 

line  of  investment  of  business  capital.  If  by  the  mere 
power  of  size  attaching  to  great  aggregations  of  capital, 
the  right  of  highway  robbery,  or  of  railway  robbery,  or  of 
public-contracts  robbery,  could  be  controlled,  a  very  consider- 
able rate  of  interest  agio  might  rule  without  any  slightest 
taint  or  alloy  of  socially  productive  service  in  any  capital 
use.  Other  distributive  shares  in  society  would  doubt- 
less have  to  pay  for  it  all,  but  the  revenues  accruing  to 
postponement  would  be  none  the  less  actual. 

In  point  of  fact,  however,  technological  productivity 
has  a  part,  and,  it  may  be,  quite  the  larger  part,  in  account- 
ing for  business  gain  from  the  use  of  capital.  But  for 
theoretical  purposes  the  only  emphasis  is  upon  the  point 
that  the  question  is  one  purely  of  entrepreneur  gain  through 
the  possession  of  entrepreneur  capital,  and  not  at  all  of  the 
particular  method  by  which  the  gain  is  achieved. 

Were  it  possible  accurately  or  even  approximately  to 
determine  in  what  degree  the  emergence  of  a  commodity 
product  at  the  end  of  its  series  of  production  and  market- 
ing processes  is  due  to  technological  productivity,  the  rela- 
tion of  technological  productivity  to  interest  would  be  a 
deal  clearer  than  it  actually  is.  But  that  all  the  mechanical 
processes  are  completed  leaves  the  commodity  far  from 
having  been  completely  "produced ;"  all  the  various  items  of 
general-management  cost,  of  taxation,  of  advertising,  etc., 
remain  to  be  computed;  and  under  the  actual  conditions  of 
business  organization,  a  fairly  definite  proportion  must  be 
maintained  between  each  of  these  lines  of  expenditure  and 
the  direct  expenditure  in  concrete  instrumental  processes. 
The  relation  between  these  different  lines  of  expenditure  is 
that  characteristic  of  interdependent  complementary  pro- 
cesses, no  one  of  which  is  more  imperatively  required  than 
any  other;  the  process  is  an  aggregate,  a  complex,  and  the 
share,  which,  as  hire,  the  instrumental  good  derives  from 
the  result,  is  the  share  which  entrepreneur  competitive  bid- 
ding attributes  to  it,  in  view  of  the  effectiveness  of  the 
instrument  in  point  of  technique,  of  the  nature  of  market 


INTEREST  255 

conditions  and  market  methods,  and  of  the  relative  attract- 
iveness of  other  than  technolog-ical  Hnes  of  productive 
expenditure.  Not  far  from  two-thirds  of  the  retail  selling- 
price  of  coffee  today  is  due  to  the  expensiveness  of  the 
competitive  methods  of  marketing. 

Thus,  were  productive  processes  more  markedly  tech- 
nological, the  interest  rates  upon  any  given  volume  of  capi- 
tal employment  might  be  higher ;  but  it  is,  perhaps,  equally 
true  that  the  present  volume  of  saving  capital  could  hardly 
be  employed,  at  the  present  level  of  development  in  tech- 
nique, in  purely  technological  lines ;  the  widening  field  of 
investment  in  non-technological  production  processes 
explains  in  large  part  the  elasticity  and  the  extent  of  the 
demand  for  capital  under  present  conditions,  and  explains 
also'  the  fact  that  the  interest  rate  has  not  come  under  the 
necessity  of  a  greater  fall.'^ 

^  Professor  Veblen  argues  {Theory  of  Business  Enterprise,  chap,  v) 
that  the  growing  employment  of  credit  by  individuals  and  by  business 
concerns,  though  it  increases  the  volume  of  business  in  terms  of  price, 
cannot,  in  view  of  competition,  increase  appreciably,  in  the  long  run, 
the  aggregate  profits  of  business,  and  cannot  appreciably  enhance  the 
aggregate  industrial  equipment  or  the  aggregate  industrial  output ;  all 
competitors  being  compelled,  through  competition,  to  extend  their  use 
of  credit,  no  advantage  can  accrue  to  them  in  the  aggregate  ;  the  added 
funds  not  going  appreciably  to  the  provision  of  increased  industrial 
equipment,  the  aggregate  social  product  is  not  expanded ;  "all  these 
advances  go  to  increase  the  'capital'  of  which  business  men  have  the 
disposal ;    but    for    the    material    purposes    of    industry,    taken    in    the 

aggregate,  they  are  purely  fictitious  items Funds  of  whatever 

character  are  a  pecuniary  fact,  not  an  industrial  one ;  they  serve  the 
distribution  of  the  control  of  industry,  not  its  materially  productive 
work."     (P.    104.) 

As  to  the  tendency  of  the  forces  under  consideration  to  bring 
about  a  progressive  consolidation  of  enterprises,  there  need,  seemingly, 
be  little  doubt ;  but  that  while  the  number  of  business  units  is 
decreasing  there  can  be  no  appreciable  increase  in  the  per-unit  profit 
is  not  so  clear.  But  is  there  really  an  increased  aggregate  of  credit, 
or  is  the  fact  simply  that  the  larger  organizations  have  merely  displaced 
the  smaller  in  the  use  of  a  practically  unchanged  volume  of  credit? 
Is  there  any  reason  to  assume  that  the  aggregate  capital  investment 
has,  through  credit,  been  increased,  and  this  without  corresponding 
increase  of  entrepreneur  gains,  and  that,  on  the  contrary,  the  enlarged 
employment  of  capital,  without  enlarging  returns,  has  necessitated 
an  actual  fall  in  the  interest  rate,  though  possibly  not  a  fall  in  the 
absolute  quantity  of  interest  outlay? 

But  for  the  most  part,  Veblen  does  not  assert  a  fall  in  the  rate 


256 


VALUE  AND  DISTRIBUTION 


It  will  now  be  profitable  to  sum  up  these  interest  conclu- 
sions so  far  as  they  are  of  immediate  relevancy  to  the 
course  of  the  argument. 

The  discount  rate,  the  interest  agio,  should,  in  analogy 
with  all  other  cases  of  market  adjustment,  coincide  approxi- 

of  interest,  but  only  a  decrease  in  the  rate  of  profit,  as  computed  upon 
the  basis  of  the  total  business  transacted  by  the  entrepreneurs  and 
upon  the  total  volume  of  "capital"  in  hand,  inclusive  of  credit  exten- 
sions ;  and  he  appears  to  account  for  the  larger  employment  of 
"capital"  chiefly  by  the  fact  that  the  productive  intermediates  are 
enhanced  in  price  through  the  competitive  bidding  of  the  competing 
entrepreneurs:  "Loan  credit  ....  taken  in  the  aggregate  serves 
only  to  widen  the  discrepancy  between  business  capital  and  industrial 
equipment.  So  long  as  times  are  brisk  this  discrepancy  ordinarily  goes 
on  widening  through  a  progressive  extension  of  credit.  Funds  obtained 
on  credit  are  applied  to  extend  the  business  ;  competing  business  men 
bid  up  the  material  items  of  industrial  equipment  by  the  use  of  funds 
so  obtained ;  the  value  of  the  material  items  employed  in  industry 
advances ;  the  aggregate  of  values  employed  in  a  given  undertaking 
increases,  with  or  without  a  physical  increase  of  the  industrial 
material  engaged  ;  but  since  an  advance  of  credit  rests  on  the  collateral 
as  expressed  in  terms  of  value,  an  enhanced  value  of  the  property 
affords  a  basis  for  a  further  extension  of  credit,  and  so  on." — 
Ibid.,  pp.  104,  105. 

"The  nominal  magnitude  (value)  of  the  earnings  is  not  increased 
in  as  large  a  ratio  as  that  of  the  business  capital.  .  .  .s  .  The  funds 
obtained  on  credit  are  in  great  measure  invested  competitively  in  the 
same  aggregate  of  material  items  that  is  already  employed  in  industry 
apart  from  the  use  of  loan  credit,  with  the  result  that  the  same  range 
of  items  of  wealth  are  rated  at  a  larger  number  of  money  units." — 
Ibid.,  pp.  108,  109. 

But  in  any  case,  the  rate  of  interest  does,  after  all,  in  Veblen's 
view,  appear  to  be  pushed  toward  fall  through  an  overvaluation  of  the 
intermediate  goods  finally  resulting  from  their  constantly  expanding 
market  prices:  "A  manifest  discrepancy  presently  arises  .... 
between  the  aggregate  nominal  capital  (capital  plus  loans)  engaged  in 
business,  on  the  one  hand,  and  the  actual  rate  of  earning  capacity  of 
this  business  capital,  on  the  other  hand"  (p.  107).  It  is  "unavoidable" 
that  "credit  expansion  is  in  some  degree  'abnormal'  or  'excessive.' 
Such  a  use  of  credit  does  not  add  to  the  aggregate  of  industrially  pro- 
ductive equipment,  nor  increase  its  material  output  of  product,  and 
therefore  it  does  not  add  materially  to  the  aggregate  gross  earnings 
obtained  by  the  body  of  business  men  engaged  in  industry,  as  counted 
in  material  terms  of  wealth  or  of  permanent  values  ;  it  diminishes  the 
aggregate  net  profits  ....  as  counted  in  such  terms,  in  that  it 
requires  them  to  pay  interest,  to  creditors  outside  of  the  industrial 
process  proper,  on  funds  which,  taken  as  an  aggregate,  represent  no 
productive  goods,  and  have  no  productive  effect ;  there  results  an 
overrating  of  the  aggregate  capital,  engaged  in  industry,  compared 
with    the  value    of   the   industrial    equipment   at   the    starting  point,   by 


INTEREST  257 

mately  with  some  fact  of  marginal  sacrifice;  and  so 
it  does.  Abstinence  is  here  one  of  the  items  of  cost  in  the 
sense  that  the  present  vohime  of  saving,  or  some  part  of  it, 
will  take  place  only  on  terms  of  the  present  level  of  com- 
pensation. The  cost  of  any  supply  item,  be  it  remembered, 
is  merely  the  money  statement  of  the  resistance  to  be  over- 
come in  order  that  the  item  in  question  shall  offer  itself 

approximately  the  amount  of  the  aggregate  deposits  and  loans  on 
collateral." — Ibid.,  p.   112. 

The  fundamental  error  in  all  this — if  error  there  be — rests  in 
Professor   Veblen's  confusion   of  bank  credit   with   loan   fund. 

We  have  already  seen  that  the  banking  function  is  merely  the 
underwriting  of  the  customer's  credit ;  banks  do  not  lend  their 
deposits ;  the  very  existence  of  this  deposit  liability  is,  indeed,  the  fact 
by  virtue  of  which  the  bank  is  limited  in  its  further  underwriting 
activity.  The  bank  does  have  an  important  influence  in  aiding  the 
process  by  which  loan  funds,  in  the  form  of  its  deposit  liabilities, 
come  into  existence ;  but  the  only  possible  lenders  of  these  are  the 
holders  of  them.  The  lending  of  them  is  a  lending  of  suspended 
purchasing  power ;  they  are  a  part,  and  a  very  considerable  part,  of  the 
great  loan-fund  supply.  This  aggregate  loan-fund  supply  furnishes, 
in  the  modern  business  organization,  the  basis  of  the  process  through 
which   private   savings   work  out  into   social   capitalization. 

Mostly  by  means  of  the  borrowing  of  loan-fund  capital,  and  to 
small  extent  or  not  at  all  by  appeal  to  bank  credit,  is  the  aggregate 
industrial  equipment  augmented.  Short-time  loans  are  not  practicable 
for  this  purpose.  Loan-fund  borrowing  is  the  true  borrowing  of 
"capital"  in  the  business  and  financial  sense.  But  it  must  be  admitted 
that  a  goodly  share  of  this  typical  capital  flows,  under  entrepreneur 
management,  into  gainful  processes — entrepreneur-wise  viewed — that 
are  not  at  all  gainful  as  socially  viewed — flows,  for  example,  into  all 
sorts  of  competitive  expense  for  attracting  trade,  into  extravagances 
of  location,  housing,  and  furnishings,  into  larger  investment  in  sales- 
men, advertising,  variety  and  size  of  stocks,  and  some  of  it,  doubtless, 
into  the  competitive  bidding  up  of  the  prices  of  the  existing  volume  of 
intermediate   goods,    whether   instruments   or   raw   materials. 

Bank  borrowing,  on  the  other  hand,  is  a  mere  issuance  of  the 
bank  guarantee,  its  indorsement,  in  support  of  the  customer's  under- 
taking to  pay,  otherwise  non-current :  this  suretyship  transaction  is 
worked  out  under  the  guise  and  terminology  of  capital  and  interest 
methods. 

This  distinction  between  bank  guarantee  and  ordinary  loan-fund 
borrowing  may  well  occasion  perplexity.  It  is,  indeed,  true  that  the 
bank  customer  tnay  use  his  bank  balance,  acquired  by  discount, 
precisely  as  he  uses  the  bank  deposit  credit  assigned  to  him  by  the 
loan-fund  capitalist.  The  difference  is  in  the  fact  that  in  substance  the 
credit  apparently  advanced  by  the  discounting  bank  is  really  advanced 
by  the  person  who  accepts  the  customer's  undertaking  as  guaranteed 
by  the  bank,  and  upon  this  undertaking  and  guarantee  makes  advances 
to  the  bank  customer.  Credit  is,  it  is  true,  here  obtained  by  the  bor- 
rowing customer,   as   truly  as   in   the  other   type   of  loan,   but  it   is   a 


258  VALUE  AND  DISTRIBUTION 

upon  the  market.  Thus  many  items  of  the  capital  supply- 
may  have  no  cost  price ;  some  saving  would  take  place  with- 
out pay ;  and  it  is  possible  that  some  part  of  each  man's 
saving  would  not  take  place  except  for  the  pay.  But  in  any 
case,    each    different   volume    of    supply   has    its    different 

credit  from  some  one  other  than  the  bank ;"  the  bank  stands  as  mere 
underwriter  of  the  credit  relation. 

Thus  under  this  form  of  credit  obtained  by  the  customer's  exten- 
sion, through  the  bank,  of  his  own  credit-borrowing  activity,  it  is 
rarely  practicable  that  the  proceeds  be  invested  in  such  long-time 
gainful  directions  as  an  increase  of  plant  or  as  an  enlargement  of  good- 
will and  connections.  The  bank  guarantee  is  of  necessity  a  short-time 
relation,  and  from  the  point  of  view  neither  of  the  bank  nor  of  the 
customer  are  its  proceeds  safely  applicable  to  other  than  forms  of 
wealth  readily  convertible  into  cash. 

Thus  the  credit  extended  by  vendors  through  the  intermediary 
of  bank  guarantee  resembles  the  credit  extended  through  ordinary 
capital-lending,  in  this,  that  neither  is  a  borrowing  of  capital  from  the 
bank ;  but  differs  in  turn  in  this,  that  the  bank-guarantee  form  can 
rarely  serve  the  purposes  of  social  productiveness  or  of  any  long-time 
gainful  application,  while  the  exact  contrary  is  the  fact  with  mortgage, 
bond,  and  preferred-stock  credits. 

But  in  whatever  way,  through  credit,  the  entrepreneur  is  enabled 
to  extend  his  operations,  whether  in  increasing  his  material  plant,  or 
in  purchasing  desirable  legislation,  or  in  extending  his  good-will  and 
connections,  or  in  the  increase  of  his  holdings  of  marketable  merchan- 
dise, there  is  much  question  as  to  the  propriety  of  regarding  any  one 
of  these  uses  of  his  own  credit  as  an  increase  in  his  business  capital. 
Admitting,  then,  that  always  "under  the  regime  of  competitive  busi- 
ness ....  credit  expansion  is  in  some  degree  'abnormal'  or  'exces- 
sive,' "  it  is  to  be  accepted  as  inevitable  that  "there  results  an  overrating 
of  the  aggregate  capital  engaged  in  industry,  compared  with  the  indus- 
trial equipment  at  the  starting  point,  by  approximately  the  amount  of 
the  aggregate  deposits  and  loans  on  collateral?"  (Ibid.,  p.  112.)  And 
is  it  true  that  the  interest  outlay  for  loans — bank  or  other — -"diminishes 
the  aggregate  net  profit  obtained  by  the  business  men  engaged  in 
industry  ....  in  that  it  requires  them  to  pay  interest,  to  creditors 
outside  the  industrial  process  proper,  on  funds  which,  taken  as  an 
aggregate,  represent  no  production  goods  and  have  no  productive 
effect" ? 

That  much  of  the  extended  credit  goes  into  socially  non-productive 
channels  is  certain  enough  ;  but  it  is  not  so  certain  that  the  process  is 
non-gainful  in  its  effect  upon  the  aggregate  profits  of  the  entrepreneur 
class  as  a  whole  ;  it  may — and  commonly  does — result  in  a  social  waste 
of  productive  energy,  and  may  yet  be  profitable  to  the  aggregate  entre- 
preneur interest. 

But  in  any  case  the  banker  is  paid,  whether  the  service  be  or  be 
not  social;  but  paid  for  what?  Here  again  the  nature  of  the  banking 
business  must  be  firmly  grasped  ;  bankers  are  paid  for  making  the 
customer's  credit  into  present  purchasing  power ;  under  the  bank  guar- 


INTEREST  259 

level  of  compensation  at  below  which  some  part  of 
the  supply  would  not  be  forthcoming.  But  as  with 
labor-pain  cost,  so  with  abstinence  cost — no  reduction 
to  a  common  pain  denominator  is  possible.  The  re- 
muneration received  is  no  measure  of  the  pain  under- 
gone or  even  of  the  resistance  overcome.  The  mar- 
ginal postponement  of  consumption,  like  any  other  case 
of  margins,  is  a  ratio  relation ;  any  particular  item  of  saving 
is  marginal,  not  because  of  the  high  significance  of  the 
abstinence  protest,  but  .merely  because  the  forces  making 

antee  the  customer's  obligation  becomes  cash  to  the  vendor  of  the 
desired  goods.  For  this  underwriting  the  customer  pays  to  the  bank, 
under  the  guise  of  interest,  that  which  he  would  otherwise  have  had 
to  pay  to  the  vendor  as  real  interest. 

But  at  any  rate,  the  mere  power  or  opportunity  or  ability  of  the 
borrower  to  borrow  is  hardly  to  be  regarded  as  capital,  nor  is  the 
exercise  of  the  power  accurately  an  increase  of  his  capital,  whether 
or  not  that  which  is  borrowed  is,  to  the  lender  of  it,  capital  goods,  or 
loan-fund  capital,  or  mere  guarantee. 

It  is,  however,  beyond  question  that  the  fact  that  one  is  possessed 
of  good  credit — the  ability  to  borrow  and  upon  advantageous  terms 
— is  a  source  of  gain  to  the  possessor ;  why,  then,  not  call  it  capital, 
and  the  return  upon  it  a  capital  rent?  The  reason  is  that  the  fact  of 
good  credit  is  really  not  a  possession  at  all  in  the  ordinary  case,  but  a 
part  of  the  possessor — a  purely  subjective  fact,  as  truly  as  any  other 
aspect  of  personal  power  or  skill  or  influence.  True,  it  is  an  advan- 
tageous fact,  a  gainful  attribute,  but  it  is  an  attribute  of  the  human 
being  to  whom  it  attaches,  and  in  close  analysis  must  receive  a  com- 
pensation under  the  category  of  profit  in  the  strict   sense  of  the  term. 

But  if  it  really  becomes  possible,  as  it  sometimes  does,  to  make  a 
separation  of  the  credit  from  its  personal  basis  and  foundation — to 
give  it  an  independent  and  external  existence,  and  so,  in  some  measure 
to  transfer  it,  say,  to  a  corporation  to  be  organized — this  credit  may,  in 
this  non-attached  form,  become,  so  far  as  the  transfer  is  really 
possible,  a  distinct  capital  fact  and,  like  good-will  and  business  con- 
nection, be  capitalized  for  whatever,  in  the  securities  market,  may  be 
held  to  be  the  present  worth  of  its  income-earning  capacity.  The 
personal  remuneration  for  the  separated  and  transferred  credit- 
attribute  must  in  such  case  be  received  in  block  by  the  original 
possessor  as  the  present  worth  of  its  putative  future  effectiveness  for 
gain  ;  and  this  putative  earning  power  then  becomes  an  asset  of  the 
grantee  company,  and  may  be  as  such  capitalized  like  any  other  asset. 

In  case  the  credit  attaches  to  a  group  of  individuals,  as  to  a  partner- 
ship or  association,  and  attaches  to  the  grouping  rather  than  to  the 
separate  individual  members  of  the  group,  it  would  then  seem  prefer- 
able to  regard  the  credit  attribute  as  in  its  nature  and  origin  a  separate 
and  objective  fact,  and  as  thus  a  part  of  the  firm  or  association  capital. 


26o  VALUE  AND  DISTRIBUTION 

for  present  consumption,  representative,  it  may  be,  of  very 
great  or  of  very  limited  present  need,  are  at  an  approximate 
equilibrium  against  the  estimates  of  the  advantages  promised 
by  postponement. 

But,  on  the  level  of  the  entrepreneur-cost  analysis,  none 
of  this  cost  to  the  lender  has  direct  significance  for  pur- 
poses of  borrower's  cost  or  for  purposes  of  any  cost 
investigation  leading  to  the  determination  of  the  value 
of  the  product.  What  the  entrepreneur  has  to  pay  is  cost 
for  him ;  lender's  cost  is  relevant  only  from  the  point  of 
view  of  explaining  the  causes  of  the  situation  under  which, 
and  as  determined  by  which,  entrepreneur  cost  has  to  be 
worked  out.  Just  as  entrepreneur  cost  is  in  no  sense  an 
employee  cost  of  pain,  but  purely  an  entrepreneur  compu- 
tation, so  such  interest  costs  as  are  relevant  to  the  cost-of- 
production  category  are  not  costs  of  abstinence  to  those 
who  do  the  saving,  but  are  costs  of  expenditure  to  those 
who  do  the  borrowing. 

This  is  evidently  not  to  deny  that  the  entrepreneur  may 
himself  have  a  postponement  cost,  as  well  as  opportunity 
costs  of  other  sorts,  e.  g.,  leisure  and  recreation,  but  the 
saver's  postponement  cost  is  not  also  a  cost  item  in  the 
entrepreneur  reckoning;  so  again,  when  a  borrower 
decides  to  consume  the  product  of  the  loan  rather  than  to 
use  it  reproductively,  his  choice  in  the  direction  of  non- 
abstinence — his  refusal  of  the  cost  burden  of  waiting — is 
his  own,  and  not  that  of  the  saving  lender ;  it  is  a  new  and 
distinct  choice. 

Thus,  the  "value  of  money"  or  of  capital,  as  of  labor 
or  machinery  or  land,  is  a  market  fact,  a  price  datum, 
which  the  entrepreneur  takes  as  he  finds  it,  without 
attempting  any  explanation,  and  without  any  call  to  make 
the  attempt.  Entrepreneur  cost  explains  the  price  of  the 
product  only  upon  the  basis  and  assumption  of  other 
established  prices  for  the  items  of  cost,  which  cost  prices 
the  entrepreneur-cost  analysis  in  question  is  not  concerned 
or  competent  to  explain. 


INTEREST  261 

The  discount  rate  also  approximately  coincides  with 
some  item  of  marginal  demand ;  there  is,  as  we  shall  later 
see,  no  very  serious  error  in  the  doctrine  that  the  interest 
rate  reflects  the  marginal  productivity  of  capital,  if  only 
the  capital  concept  be  interpreted  widely  enough  and  in 
the  competitive,  entrepreneur  tenor,  and  if  the  notion  of 
productivity  be  not  socially  but  competitively  conceived 
and  be  applied  in  a  sufficiently  extended  sense.  (See 
chap,  xi.) 

This  interest  discussion  has  gone  far  more  deeply  into 
the  interest  problem  than  the  cost-of -production  category 
has  need  for ;  but  this  was  nevertheless  necessary  purely 
for  the  purpose  of  finding  out  what  was  really  needed  and 
what  relation  interest  bears  to  entrepreneur  cost.  And  so 
much  as  this  becomes  clear  from  our  analysis,  that  within 
entrepreneur  cost  must  be  computed,  not  merely  wages  and 
the  different  rents  of  different  productive  agents,  but  also 
a  time  charge  for  the  value  fund  in  the  entrepreneur 
employment,  according  to  the  length  of  time  of  this 
employment.  That  is  to  say,  cost  of  production  reckons, 
among  other  items  of  cost,  like  wages,  taxes,  rent  on  land, 
rent  on  capital  goods,  etc.,  an  interest  charge  on  the 
capital-fund  investment. 

And  as  will  later  more  fully  appear,  interest,  in  the 
sense  of  time  discount,  must  be  recognized  as  a  distributive 
share,  precisely  because  it  is  a  cost  under  the  entrepreneur 
system  of  production  and  distribution ;  cost  payments  by 
the  entrepreneur  are  distributive  shares  to  the  payees.  It 
is  not,  however,  to  be  inferred  that  every  case  of  interest 
payment  is  a  payment  made  as  incidental  to  a  productive 
process.  There  are  interest  revenues  that  are  not  deriva- 
tive from  the  productive  process,  and  are  not  to  be 
regarded  as  distributive  shares  out  of  a  produced  value. 
Many  cases  fall  purely  and  solely  within  what  we  may  call 
the  secondary  distribution,  as  distinguished  from  the 
primary,  the  production  distribution.     (See  chap,  xxvi.) 


CHAPTER  XVI 
RENT  AND  COST— MARGINAL  COST— RELATIVE  COST 

John  Stuart  Mill,  following  out  the  implications  of 
Ricardo's  proportionment  doctrine  and  recognizing  that 
value  is  essentially  relative,  perceived  that  costs  of  pro- 
duction as  bearing  on  value  must  likewise  be  relative,  and 
thus  that  the  exchange  relation  between  different  goods  can 
be  afifected  by  only  such  causes  as  unequally  affect  the  costs 
of  different  goods ;  and  accepting  also  from  Ricardo,  and 
with  approximately  complete  consciousness,  the  entrepreneur 
point  of  view, ^became  clear  to  Mill  that,  for  a  cost- 
of-production  doctrine  adequate  and  serviceable  and  con- 
sistent from  this  standpoint,  cost,  on  the  labor  side,  must  be 
held  to  be  not  the  labor  and  not  the  pain  of  the  labor,  but 
the  wages  paid  for  the  labor ;  and  it  followed  also  that  if, 
in  a  given  line  of  employment,  the  efficiency  is  greater  in 
the  same  proportion  that  the  wages  are  higher,  the  relative 
wage  cost  is  not  affected. 

And  it  thereupon  followed  that  wages  payments  become 
relevant  to  value  only  in  so  far  as  one  commodity  requires, 
relatively  to  another,  more  labor  or  a  more  highly  paid 
variety  of  labor :  "Things  ....  which  are  made  by 
skilled  labor  exchange  for  the  produce  of  a  much  greater 
quantity  of  unskilled  labor,  for  no  reason  but  because  the 
labor  is  more  highly  paid."  [Mill's  habit  of  regarding 
cost  items  as  opaque  and  definitive  facts.]  "So  wages  do 
enter  into  value ;  the  relative  wages  of  the  labor  necessary 
for  producing  different  commodities  affect  their  value  as 

much    as    the    relative    quantities    of    labor The 

absolute  wages  paid  have  no  effect  upon  value,  but  neither 
has  the  absolute  quantity  of  labor."  ^  However,  since 
variations  in  wages  are  usually  general,  it  is.  Mill  says,  by 

*  Principles  of  Political  Economy,  Book  III,  chap,  iv,  sec.  3. 

262 


RENT  AND  COST  263 

variations  in  the  relative  quantity  of  labor  required  in  pro- 
duction that  variations  in  value  commonly  come  about.^ 
Similarly  also  with  interest  and  profit  elements  in  cost; 
these  charges  are  presented  as  affecting  value  only  as  they 
enter,  in  varying  measure,  into  the  costs  of  different  com- 
modities. 

It  is  manifest  that  Mill  is  here  treating  cost  consistently 
from  the  entrepreneur  point  of  view;  labor  charges  are 
conceived  to  enter  the  computation  only  as  reduced  to 
price-value  homogeneity  in  the  entrepreneur  outlay, — an 
unquestionable  fact  which,  by  the  way,  has  led  some 
economists  to  the  notion  that  labor  is  an  abstract  fund.^ 

Likewise  with  capital  the  entrepreneur  reckoning  holds, 
and  this  equally  whether  the  question  be  one  of  interest 
charges  on  loan-fund  borrowing,  or  of  rentals  paid  for 
machinery,  or  of  interest  paid  as  a  percentage  rate  upon 
the  price  expression  of  the  machinery  as  a  value  fund — 
from  which  last  method  it  has  been  by  some  economists 
inferred  that  capital  is  an  abstract  fund. 

And  precisely  as  these  items  of  outlay  for  capital  goods 
attain  the  homogeneity  requisite  for  cost  computations  only 
by  virtue  of  their  reduction  to  the  common  denominator  of 
price,  so  also,  under  the  same  reduction  to  terms  of  price, 
there  enter  into  the  cost  reckoning  minimum  wages  or 
profits  of  superintendence ;  from  which  fact  it  may  some- 
times be  inferred  that  profit-receivers  are  also  an  abstract 
fund.  And  forthwith,  these  three  separate  factor  funds 
having  been  successfully  established,  the  logic  of  the  case 
will  compel  their  merger  into  one  great  and  inclusive  fund 
of  abstract  units  of  value  productivity. 

It  results,  then,  from  Mill's  doctrine,  that  values  are 
not  proportionate  to  the  labor  applied,  or  to  the  capital 
applied;  nor  is  the  problem  one  of  some  sort  of  compound 
proportion    of    these,    as    Ricardo    seems   often    upon    the 

'  Ibid. 

^  For  example,  Marx,  notoriously ;  see  also  Macfarlane,  Value  and 
Distribution,  pp.  267,  270 ;   Clark,  Distribution  of  Wealth,  chap.  xi. 


l.^ 


264  VALUE  AND  DISTRIBUTION 

point  of  asserting.  Instead  of  this,  value  reduces  to  a 
simple  proportion  based  upon  the  price  costs  incurred,  or, 
undoubtedly,  if  one  prefers,  to  a  compound  proportion  in 
which  each  and  every  outlay  appears  under  the  price 
denominator. 

'  But  if  such  was  really  Mill's  doctrine,  how  came  it 
about  that  rent  outlays  were  excluded  from  cost?  The 
answer  is  that  Mill  did  not  exclude  them;  he  expressly 
admitted  them : 

No  one  can  deny  that  rent  does  sometimes  enter  into  cost  of 
production.  If  I  buy  or  rent  a  piece  of  ground,  and  build  a  cloth 
manufactory  upon  it,  the  ground  rent  forms  legitimately  a  part  of 
my  cost  of  production,  which  must  be  repaid  by  the  product.* 

Mill's  view  was,  however,  that  rent  outlays  do  not  com- 
monly enter  into  the  marginal  cost  of  production ;  and 
with  Mill  as  with  Ricardo,  it  was  this  marginal  cost  that 
was  price-determining.  The  doctrine  applies  especially — 
and  most  clearly  and  most  importantly — to  agricultural 
products.  "Rent  forms  no  part  of  the  cost  of  production 
which    determines    the    value    of    agricultural    products."  ^  l^ 

This  doctrine  was  obviously  Ricardian,  and  needs  no  de- 
tailed restatement  at  this  point.  Ricardo  placed  rent  out  of 
connection  with  value,  by  getting  it  out  of  marginal  costj 
This  marginal  cost  he  found  upon  marginal  land,  rentless 
land.  Nor  need  it  especially  matter  if  no  rentless  land  were 
found ;  for  there  was  always  the  intensive  margin,  and  at  this 
margin  it  was  equally  possible  to  isolate  a  product  in  the 
cost  of  production  of  which  rent  could  have  no  part;  this 
product  would  therefore  function  as  the  marginal  product, 
a  product  produced,  if  not  upon  marginal  land,  yet  upon 
the  rentless  margin  of  rent-bearing  land.  And  thus  if  (i) 
marginal  cost  could  be  identified  with  cost  upon  marginal 
land,  and  then  (2)  this  marginal  land  could  be  accepted  as 
the  price-determining  influence  in  cost,  the  Ricardian  case 

*  Mill,  op.  cit.,  Book  III,  chap,  iv,  sec.  6. 
"  Ibid.,  chap,  v,  sec.  2. 


RENT  AND  COST  265 

was  established.  With  rent  excluded,  and  with  capital 
reduced  to  the  labor  denominator,  value  became  propor- 
tional to  labor  content. 

But  these  two  important  steps  in  the  argument  were 
merely  taken  for  granted — assumed  out  of  hand — perhaps 
by  title  of  their  sheer  reasonableness.  At  all  events,  these 
two  propositions  present  the  problems  next  awaiting 
examination  at  our  hands :  ( i )  Is  the  cost  margin  an 
instrument  margin?  (2)  And  in  what  sense,  if  any, 
is  one  item  of  supply  more  price-determining  than  any 
other  ? 

( I )  Is  the  cost  margin  a  land  margin  ?  It  is  significant 
upon  this  point  to  notice  that  for  non-agricultural  indus- 
tries the  trend  of  authority  appeals  rather  to  the  marginal 
entrepreneur.  Mill's  reasoning  itself  looks  in  this  direc- 
tion, and  Walker — no  matter  how  badly  his  marginal 
entrepreneur  was  selected — stands  distinctly  for  the  view 
that  marginal  cost  is  cost  at  the  personal  margin;  and  so 
with  most  other  writers.  And  evidently  there  must  be  a 
cultivator  upon  marginal  land.  Perhaps  a  sympathetic 
interpretation  might  harmonize  the  old  with  the  newer 
doctrine,  by  taking  Ricardo  to  have  regarded  the  cultivator 
as  marginal  because  on  marginal  land.  But  if  so,  we 
must  likewise  regard  as  marginal  that  cultivator  who  is 
getting  on  somehow  with  machinery,  part  or  all  of  which  is 
worthless — marginal  capital  goods ;  it  would  perhaps  be  as 
promising  a  quest  to  hunt  for  no-interest  or  no-wage  pro- 
duction as  for  no-rent  production.  Evidently  labor  and  "" 
capital  may  be  applied  upon  no-rent  land — no  land,  but  it 
is  equally  true,  and  perhaps  more  common,  that  worthless 
machinery, — no-interest  capital  goods,  that  is,  no  capital, — is  \/ 
combined  with  land  and  labor,  or  that  worthless  labor,  A^ 
child,  pauper,  invalid,  or  convict,  is  combined  with  capital 
and  land.  And  it  has  been  many  times  pointed  out  that  the 
Ricardian  doctrine  must  thereupon  logically  exclude  / 
wages  and  interest  from  value-determining  cost.  ' 


266  VALUE  AND  DISTRIBUTION 

And,  going  over  to  the  intensive  margin,^  for  a  really 
workable  land  margin,  it  should  be  immediately  evident 
that  capital  instruments  applied  on  marginal  land,  or  upon 
any  other  land,  are,  or  may  be,  supplied  with  labor  to  the 
point  where  only  the  labor  is  remunerated  in  additional 
product;  whereby,  by  parallel  argument,  only  wages  are 
left  as  cost.  And  it  is  evident  also  that  every  holding  of 
land,  if  rationally  handled,  receives  expense  outlay  to  the 
point  where,  in  the  circumstances  of  each  respective  culti- 
vator, no  further  outlay  is  expedient  in  view  of  the  further 
remuneration.  That  is  to  say,  the  intensive  margin  is  to  be 
found  on  all  land,  and  with  most,  if  not  with  all,  capital 
instruments. 

And,  finally,  this  land-margin  view  must  face  the  diffi- 
culty, already  sufficiently  elaborated,  that  the  entrepreneur 
>/  in  his  borrowing  does  not  borrow  land  or  capital  or  labor, 

but  only  purchasing  power,  and  follows  a  most  catholic 
system  of  interchange  and  substitution  among  the  various 
productive  factors. 

But  whether  or  not  this  land-margin  cost  doctrine  needs 
abandonment  forthwith,  the  entrepreneur  margin  being 
accepted  in  place  of  it,  it  is  at  all  events  clear  that  even 
upon  marginal  land  there  must  be  an  entrepreneur,  and 
that  the  land  is  marginal  only  as  related  to  him  and  to  his 
separate  labor  and  equipment.  It  is  not  absolutely  neces- 
sary, indeed,  that  wage  or  implement  outlays  be  under- 
taken by  him;  if  he  can  get  along  with  valueless  land,  he 
may  quite  as  reasonably  do  as  much  and  as  well  with 
scrap-pile  tools.  But  however  this  may  be,  it  is  certain 
that  no  piece  of  land  and  no  item  of  implement  wealth  can 
ever  be  abandoned  as  unproductive,  or  be  appraised  as  pre- 
cisely on  the  line  between  use  and  non-use,  excepting  as  the 
expression  of  a  human  choice,  a  fact  in  the  psychology  of 
some  entrepreneur,  his  judgment  as  to  the  adaptability  of  a 
means  of  production  to  his  needs  as  an  independent 
producer. 

°  Cf.   Hollander,   Quarterly  Journal  of  Economics,  January,   1893. 


RENT  AND  COST  267 

A  further  argument  in  defense  of  the  Ricardian  doc- 
trine needs  at  this  point  to  be  again  called  to  mind.  It  is 
urged  that  rent  outlays  upon  the  better  land  ought  not  to 
rank  as  cost  items,  since,  for  whatever  is  differentially 
expended  in  rent,  a  precisely  equivalent  differential  of 
advantage  is  obtained;  the  better  lands  are  no  dearer,  and 
no  cheaper,  at  the  higher  rent  than  are  the  poorer  lands  at 
the  lower  rent;  the  more  rent  payment,  the  more  land 
service,  and  the  correspondingly  larger  product : 

It  is  true  that  all  tenant  farmers  and  many  other  classes  of 
producers,  pay  rent.  But  ....  whoever  cultivates  land,  paying 
a  rent  for  it,  gets  in  return  for  his  rent  an  instrument  of  superior 
power  to  other  instruments  of  the  same  kind  for  which  no  rent  is 
paid.     The  superiority  of  the  instrument  is  in  exact  proportion  to 

the  rent  paid  for  it The  real  expenses  of  production  are 

thus  incurred  on  the  worst  land Whoever   does  pay  rent 

gets  back  its  full  value  in  extra  advantage,  and  the  rent  which  he 
pays  does  not  place  him  in  a  worse  position  than,  but  only  in  the 
same  position  as,  his  fellow  producer  who  pays  no  rent,  but  whose 
instrument  is  one  of  inferior  efficiency.'' 

It  only  needs  be  suggested  that  this  argument  really 
abandons  the  land-margin  and  accepts  the  entrepreneur- 
analysis  point  of  view,  and,  so  far  as  it  is  valid  for  any 
purpose,  goes  to  prove  that  the  costs  of  production  are 
equal  upon  all  lands,  and  therefore  that  all  lands  are  equally 
marginal, — an  argimient  reinforcing  and  supplementing  the 
point  lately  made  that  for  every  farm  and  with  every 
farmer  there  is  an  intensive  margin. 

But  some  still  more  perplexing  conclusions  appear  to 
follow  from  Mill's  argument,  if  it  is  accepted — conclu- 
sions that  may  well  call  for  lengthy  consideration,  since, 
with  its  acceptance,  there  will  be  rendered  necessary  a 
fundamental  revision  of  an  entire  series  of  important 
theoretical  doctrines. 

If,  from  that  sort  or  aspect  of  cost  which  is  to  be 
regarded  as  price-determining,  rent  is  to  be  excluded  by 

^  Mill,  op.  cit..  Book  II,  chap,  xvi,  sec.  6. 


268  VALUE  AND  DISTRIBUTION 

virtue  of  the  fact  that,  for  whatever  increase  of  expense  is 
made  by  renting  the  better  land,  a  corresponding  advan- 
tage of  opportunity  is  secured  and  a  corresponding 
increase  of  marketable  product  obtained,  it  will  directly 
follow  that  interest  paid  for  the  control  of  larger  capital, 
or  higher  wages  paid  for  a  better  grade  of  efficiency,  or 
for  a  larger  force  of  employees,  must  by  parallel  argument 
be  excluded  from  value-determining  cost. 

That  there  is  an  inviting  quality  in  this  conclusion, 
despite  the  seeming  paradox  and  absurdity  of  it,  may  be  in 
part  inferred  from  the  fact  that,  as  will  later  appear, 
some  of  the  Austrian  school  have,  on  entirely  independent 
reasonings,  arrived  at  it.'^     Mill's  doctrine,  outlined  a  few 

**  The  following  resume  of  Pierson's  cost  doctrine  (Dr.  N,  G.  Pierson, 
Principles  of  Economics,  translated  from  the  Dutch  by  A.  A.  Wotzel, 
Macmillan,  1902)  will  be  of  service  as  throwing  some  light  upon  the 
later  trend  of  cost  doctrine  with  the  Austrian  school.  The  interests  of 
space  must  stand  as  excuse  for  the  more  or  less  chaotic  fashion  of 
quotation  and  comment  in  the  following ;  when  words  other  than  those 
of  Pierson — as  translated — are  used,  or  when  comments  are  inter- 
polated, brackets  will   so   indicate : 

"In  the  language  of  every  day,  cost  price  indicates  the  sum  total 
of  the  disbursements  which  an  entrepreneur  has  to  make  in  order  that 

he    may    procure    a    given    quantity    of    commodities This    is 

the  only  fact  that  possesses  interest  for  him  when  he  wants  to  know 
the  cost  price  of  his  products.  But  the  economist,  when  he  is  consider- 
ing the  conditions  for  promoting  the  welfare  of  society  as  a  whole,  has 
to  be  careful  not  to  view  things  from  the  standpoint  of  the  entrepre- 
neur. Under  no  circumstances  may  he  place  wages  on  the  same  foot- 
ing with  fuel  and  fodder  as  part  of  the  cost  (p.  62).  [Surely  there  are 
here  two  distinct  points  of  view,  and  each  for  its  ptirpose  is  worthy  of 
consideration  ;  but  it  has  yet  to  be  shown  that,  in  an  investigation  of 
value  in  a  competitive  society,  we  may  safely  abandon  the  competitive 
reckoning  and  adopt  the  social  point  of  view.]    ....    Let  us  imagine 

a    number    of    persons   united    in    a    co-operative    society One 

contributes  capital  and  land;  another  his  knowledge;  a  third  his  muscu- 
lar strength,  and   so   on Now  as  to   cost:   many  have  had   to 

draw   something   on    account   in    the    course   of   the   year Are 

these  disbursements  part  of  the  cost?  Certainly  not:  they  are  portions 
of  the  jointly  acquired  income  resulting  from  the  enterprise.  The 
only  items  that  can  be  reckoned  as  costs  are  :  corn  used  for  sowing, 
live  stock  that  has  perished  [etc.].  [This  notion  that  cost  can  in  no 
case  cover  alternative  income  has  this  fault  at  least,  that  it  gives  no 
notion  or  measure  of  the  influences  that  serve  as  counter-inducement 
against  the  production  of  the  product  in  question.  As  Crusoe  must 
reckon  a  displacement  cost,  a  disadvantage  by  foregoing — opportunity 
cost — so   must  society   face   a  precisely   similar   cost   in   the   alternative 


RENT  AND  COST  269 

pages  back,  that  value  is  affected  only  by  relatively 
high  wages,  or  by  relatively  high  interest  outlays,  or — and 
here  the  interpretation  is  less  confidently  made — by  rela- 
tively high  rental  burdens,  has  the  same  logical  trend  and 
must  pass  for  something  more  than  a  mere  analogy. 

Taking  note  that  the  inquiry  at  its  present  stage 
engages  us  in  a  quest  for  personal  margins,  rather  than 
for  instrument  margins,  let  us  ask  ourselves  what  cost 
influences  are  of  the  sort  to  make  one  producer  marginal  as 
against  another,  that  is,  what  costs  are  margin-determin- 
ing costs. 

It  is  evident  that  a  fall  in  demand,  expressing  itself  in 

applications  of  social  productive  power.]  Let  us  now  modify  our  hypo- 
thesis :  The  workers  ....  demand  a  fixed  wage  in  lieu  of  weekly 
payments  on  account,  and  the  landowners  demand  a  fixed  rent.  The 
result  of  this  is  that  the  enterprise  loses  its  co-operative  character,  as 
the  risk  will,  in  future,  be  borne  by  certain  members  of  the  society 
only.  But  this  does  not  change  the  economic  character  of  what  the 
workers  and  the  landowners  receive.  That  which  is  paid  them  con- 
sists still  ....  of  products  of  the  enterprise  (p.  62).  [This  is  the 
social  point  of  view  at  the  extreme  of  statement.  The  truth  seems  to 
be  that,  precisely  because  the  co-operative  character  has  been  lost  and 
the  enterprise  has  come  to  be  conducted  for  individual  profits, 
there  has  come  to  be  someone  to  reckon  these  wage  and  rental 
outlays  as  cost.  True  the  wages  and  the  rent  are  incomes  derived,  as 
all  incomes  must  be  derived,  from  product,  but  that  which  is  income  to 
laborer  or  landlord  may  be  none  the  less  cost  to  the  employer  or  the 
tenant.  And  it  is  precisely  for  this  reason  that  the  investigation  of 
costs  and  of  their  relations  to  value,  is  at  the  same  time  an  investiga- 
tion  of  distribution.] 

"We  see  that  what  the  entrepreneur  regards  as  the  cost  price  of 
his  products  is  a  very  mixed  sum.  It  certainly  includes  what  would  be 
the   cost   in   the    narrower   or    social    sense ;    but   ....   generally    the 

greater    part   ....   consists    of    income    and    nothing    else 

The  entrepreneur  has  every  right  to  reckon  all  these  prearranged 
disbursements  as  part  of  his  cost ;  but  we  know  very  well,  and  so  does 
he,  that  they  only  make  up  the  sum  which  he  must  pay  out  of  the 
income  he  earns  as  recompense  for  the  assistance  afforded  him  in 
earning  it  (p.  63).  [There  is  surely  no  room  for  diflference  of  opinion 
here,  excepting  as  to  the  question  whether,  in  a  competitive  society, 
the  costs  of  competitors  are  the  costs  with  which  an  investigation 
of  value  is  concerned,  and  whether  in  fact  the  other  concept  of  cost, 
the  social  concept,  has  any  relevancy  to  the  problem  in  hand.]  The 
greatest  confusion  of  thought  arises  from  a  failure  to  observe  the 
distinction  between  cost  from  the  point  of  view  of  the  entrepreneur 
and  cost  from  the  point  of  view  of  society  as  a  whole  (p.  63). 

"We  now  return  to  the  question,  What  is  the  price  that  mankind 


/ 


270  VALUE  AND  DISTRIBUTION 

the  falling  price  of  some  one  product,  must  drive  some 
producers  into  other  lines  of  production ;  but  which  pro- 
ducers? Only  such  product  will  continue  to  come  upon  the 
market  as  can  be  produced  at  this  lower  price ;  the  price 
will  still  be  commensurate  with  the  costs  of  that  producer 
who  now  stands  as  marginal  under  the  new  conditions ; 
but  would  this  fall  in  price  be  selective,  or  be  influential 
in  any  degree,  in  determining  which  producer  should 
be  marginal?  And  so  with  all  the  outlays  of  pro- 
duction ;  each  producer  faces  the  same  external  con- 
ditions of  production,  the  same  wages  and  rent  and 
interest  levels;  these  burdens  are  common  to  all  the  com- 

has  to  pay  for  the  things  that  it  needs?  The  price  consists  not  of 
wages,  but  of  labor;  not  of  interest  or  capitali,  but  of  the  using  of 
capital;  not  of  profit,  but  of  care  of  management  (p.  64).  [What  of 
rent,  or  of  the  use  of  land  ?  Does  this  go  or  not  go  with  interest  or  the 
use  of  capital  ?  And  only  a  little  while  ago  it  appeared  that  the 
co-operative  society  had  no  costs  other  than  the  consumed  material  of 
agents.  Perhaps  it  is  important  that  Pierson  asks  here,  What  is  the 
price — there,  What  was  the  costf^  Wages,  interest,  and  profit,  speak- 
ing in  the  social  sense,  are  not  parts  of  the  cost  of  production  ;  they 
are  parts  of  what  is  produced.  They  are  not  things  sacrificed,  but 
things  gained  (p.  64).  [But  note  that  labor,  as  distinguished  from 
wages,  and  the  uses  of  agents  are  still  called  the  prices  of  product, 
though  it  is  perhaps  not  clear  whether  or  not  they  are  costs.']  .... 
If  we  want  to  ascertain  the  net  as  distinct  from  the  gross  income  of 
society  ....  we  need  only  deduct  what  has  been  spent  for  the 
purpose  of  replacing  and  maintaining  commodities  which  hare  been 
wholly  or  partially  destroyed  in  the  process  of  production  itself.  But 
in  their  turn  these  commodities  are  the  fruits  of  labor,  and  so  we 
arrive  at  the  conclusion  that  labor,  the  trouble  of  production,  is  the 
sole  price  which  mankind  pays  in  order  to  procure  such  things  as  it 
deems  to  be  necessary.  That  is  to  say,  the  only  positive  price ;  for 
there   is   also   a  negative   price,   if   such    an   expression   be   permissible. 

The  negative  price  consists  in  absence  from  present  enjoyment 

It  is  ....  a  sacrifice  made  by  those  who  practice  it ;  a  price,  a 
negative  price,  if  we  must  so  call  it,  paid  by  man  in  order  to  obtain 
the  commodities  which  he  desires  to  possess  (p.  64).  [But  this,  one 
fancies,  is  not  intended  to  make  interest  a  cost  ;  and  the  uses  of 
capital  have  been  reckoned  once  as  "the  price  which  mankind  has  to  pay 
for  the  things  it  needs  ;"  now  the  sacrifice  of  absence  in  accumulating 
and  holding  capital  comes  in  somehow,  seemingly  as  a  new  cost,  but  a 
cost  in  the  negative  sense.  The  reconciliation  must  be  found  in  some 
difference  of  meaning  between  cost  and  price.  But  all  the  while,  what 
about  land  and  the  compensation  for  not  wearing  it  out — for  applying 
the  expenses  of  upkeep?  Abstinence  certainly  obtains  here  if  anywhere. 
Is  land  regarded  as  capital  and  are  its  uses  parallel  to  uses  of  capital, 
which   latter  are  ranked  as  part  of  "mankind's  price"?     At   any   rate, 


RENT  AND  COST  27I 

petitors  in  the  field ;  why  then  is  any  producer  marginal  ? 
It  is  true  that  for  such  industries  as  are  distinctly  capital- 
istic, or  distinctly  land-using-  in  their  technique,  or  distinctly 
wage-paying,  there  will  follow,  in  case  of  changes  in  wage 
or  interest  or  rent  levels,  marked  effects  upon  the  relative 
volumes  of  products,  and  upon  the  relative  prices  of 
products.  But  the  question  again  presents  itself,  are  not 
all  competitors  equally  subject  to  these  conditions?  What 
influences  select  the  marginal  man,  the  price-determining 
man,  so  called? 

That  one  man  is  marginal  as  against  another  must,  it 
seems,  be  due  to  such  peculiarities  in  him,  or  in  his  circum- 

it  is  to  be  remembered  that  some  of  the  land  is  not  the  result  of  labor, 
while,  as  certainly,  some  of  it  is.  This  seems  likely  to  make  trouble  for 
"the  conclusion  that  labor  is  the  sole  price  that  mankind  pays,  etc." 
But  inasmuch  as  the  concept  of  price,  whether  it  mean  the  same 
thing  as  cost  price  or  not,  is  a  social  concept,  and  therefore  has,  in  a 
competitive  society,  little,  if  anything,  to  do  with  value,  it  perhaps  does 
not  greatly  matter  what  relation  to  the  case  rent  and  land  and  land 
uses  may  hold.] 

"Not  only  do  the  expressions  value  and  cost  price  [cost  price  mean- 
ing labor  and  abstinence]  differ  widely  in  meaning,  but  the  one 
actually  means  the  reverse  of  the  other.  Nevertheless  ....  the 
relation  between  the  value  of  things  in  most  cases  corresponds  pretty 
nearly  to  the  relation  between  the  respective  cost  prices. 
[This  sounds  Ricardian,  but  it  is  not ;  for]  How  is  this 
to  be  explained  ?  The  reason  is  that  everyone  prefers  to  apply  his  labor 
to  the  production  of  such  things  as  will  afford  him  the  greatest  amount 
of  enjoyment.  Value  is  the  regulatrix,  so  to  speak,  of  labor.  It  deter- 
mines the  direction  in  which,  ....  the  objects  to  which,  labor  shall 
be  applied.  Speaking  very  broadly,  every  kind  of  labor  will  be  con- 
tinued up  to  the  point  at  which  it  becomes  as  remunerative  as  any 
other  kind  of  labor.  [And  one  would  infer  that  it  will  be  continued 
only  so  far ;  but  of  course  this  is  simply  awkwardness  of  expression. 
The  real  significance  of  the  principle  would  be  better  brought  out,  were 
it  said  that  labor  will  not  be  continued  in  one  direction  when  it 
becomes  less  remunerative  than  in  any  other  direction,  that  is,  than 
the  same  labor  in  a  different  employment ;  but  this  would  have  implied 
and  almost  imposed  the  notion  of  a  displacement,  a  sacrifice  or  oppor- 
tunity cost.  And  note  that  the  phrase  less  remunerative  or  as  remun- 
erative is  not  quite  accurate ;  less  attractive,  all  things,  including 
remunerations,  being  considered,  would  adequately  cover  the  case.] 
As  a  result  of  this,  most  commodities  automatically  acquire  a  certain 
value  in  relation  of  each  other,  which  corresponds  approximately  to  the 
proportion  between  their  respective  costs  in  labor  (p.  65).  [This 
doctrine  of  choice  between  the  alternative  applications  of  the  productive 
powers  at  one's  disposal  must  logically  include  costs,  not  merely  in 
labor,  but  in  capital  and  land.]        An  example  may  serve  to  make  this 


272  VALUE  AND  DISTRIBUTION 

stances,  as  render  his  relation  to  the  market  situation  a 
pecuhar  relation.  And  this  is  not  to  deny  that  there  are 
lands  especially  adapted  to  particular  lines  of  production 
and  thereby  especially  subject  to  change  in  cultivation  with 
changes  in  market  levels.  But  that  under  a  particular 
cultivator,  these  lands  are  especially  liable  to  change  in 
use,  must  rest  with  the  peculiar  tastes,  abilities,  or  situation 
of  the  particular  cultivator. 

Nor  does  this  view  at  all  deny  that  rent,  interest,  and 

wage  outlays  are  costs ;  clearly  they  are  costs ;  no  issue  is 

y       offered  upon  this  point.     But  are  they  those  parts  of  cost 

by   virtue   of   which   one   individual   becomes   marginal   as 

against     another?        Margin-determining     influences — the 

clear.  Suppose  that  in  a  certain  country  it  requires  exactly  the  same 
ef5fort  to  produce  half  a  ton  of  wheat  as  it  requires  to  produce  a  ton  of 
rye.  The  proportion  in  which  the  cost  price  of  wheat  stands  to  that 
of  rye  will  therefore  be  as  2:1  (p.  65).  [The  example  raises  more 
difficulties  than  it  clears  up ;  for  evidently  we  are  not  now  talking  of 
any  one  man's  choice  as  to  how  he  shall  apply  his  productive  forces 
and  agents,  in  which  case  labor  and  value  products  might  be  assumed 
to  be  proportional ;  but  we  are  talking  of  society  and  of  market  values ; 
it  therefore  becomes  impossible  to  assert  that,  country-wide  and  for 
different  men,  wheat  takes  twice  as  much  labor  as  rye,  unless  upon  the 
assumption  of  some  sort  of  jellification,  both  of  labor  and  of  land, — 
some  reduction  in  value  denominator  or  otherwise,  to  homogeneous 
quantities.]    .... 

"The  value  of  things,   as  some  people  put   it,   depends  upon  or   is 

determined     by    their    cost    of    production However   .... 

things  do  not  derive  value  from  the  fact  that  they  have  cost  labor ; 
labor  has  been  expended  upon  them  because  they  have  value.  [This 
leaves  the  quantum  of  resistance,  the  forces  limiting  supply,  still  to  be 
explained,  which  explanation  cannot,  in  terms  of  utility  or  value,  be 
accomplished,  excepting  as  expressed  in  the  pull  upon  labor  (and  upon 
land  and  capital)  exerted  by  the  other  values  alternatively  possible ; 
and  this  reinstates  the  doctrine  of  costs,  under  the  form  of  sacrifice, 
displacement,  opportunity  foregone.]  The  value  of  commodities  is  not 
determined  by  the  amount  of  exertion  involved  in  their  production, 
but  by  the  amount  of  inconvenience  arising  from  our  being  deprived 
of  them.  [Here  again  is  utility  asserted  not  merely  as  primary,  which 
it  is,  but  as  exclusive  of  cost,  which  it  is  not ;  since  cost  and  alternative 
utilities  or  values  are — often,  at  least — one  and  the  same.]  Instead, 
therefore,  of  saying  that  the  values  of  things  depend  upon  their  cost 
of  production  [labor  cost],  let  us  rather  say  that  the  value  of  com- 
modities ....  must,  in  the  long  run,  coincide  with  their  respective 
costs  of  production  (p.  66).  [All  of  which  would  be  satisfactory  to  any 
cost-of-production  theorist,  were  it  not  for  the  distinctly  labor-cost 
implications  and   emphasis.]    .    .    .    ." 


RENT  AND  COST  273 

decisive  variants  in  the  situation — are  found  in  the  ability 
or  lack  of  ability  to  buy  closely,  hire  cheaply,  organize 
economically,  sell  skilfully,  or  in  the  degree  of  aptitude  or 
preference  for  some  other  line  of  production.  That  is  to 
say,  cost  as  a  margin  determinant  is  purely  a  matter  within 
the  personal  aspects  of  entrepreneurship,  a  managerial 
fact,  a  subjective  phenomenon,  in  which  all  the  influences 
bearing  upon  the  psychology  of  choice  between  different 
occupations  or  between  occupation  and  leisure  have  their 
place. 


F 


This  leads  us  back  to  the  second  part  of  our  inquiry: 
Of  what  significance  is  the  marginal  instrument  or  the 
marginal  producer,  when  once  one  is  found?  In  what 
sense,  if  any,  is  one  item  of  supply  more  price-determining 
than  any  other?  For,  after  all,  all  investigations  on  the 
cost  side  of  the  value  equation  are  important  only  as  bear- 
ing upon  the  question  of  the  supply,  and  all  our  talk  of 
margins  serves  only  the  purpose  of  explaining  supply  fluc- 
tuations. It  is  true  that  only  by  the  close  analysis  of  what 
is  characteristic  in  marginal  relations  does  the  ready  and 
sensitive  response  of  supply  and  demand  and  value  to  the 
changing  conditions  of  production  become  intelligible. 
But  it  remains  true  that  market  value  is  the  equation  point 
between  the  whole  volume  of  supply  over  against  the  whole 
volume  of  demand.  Each  and  every  item  of  supply  has  its 
small  share  of  influence  upon  the  market  outcome.  "The 
withdrawal  of  iron  from  any  one  of  its  necessary  uses 
would  have  just  the  same  influence  on  its  value  as  the 
withdrawal  from  its  marginal  use."  ^  The  marginal  item 
whether  of  demand  or  of  supply  differs  from  any  other 
item  only  that  through  it,  as  marginal  increment,  a  deter- 
mination may  be  reached  as  to  just  what  effect  it,  or  any 
other  single  item,  has  had  upon  the  price  adjustment,  meas- 
urement being  made  from  the  point  at  which  all  the  other 

*  Marshall,  Principles  of  Economics,  4th   ed.,   p.   580,   note. 


2  74  VALUE  AND  DISTRIBUTION 

forces  in  the  market  would  otherwise  have  left  the  price. 
Not  to  the  soldier  who  fires  the  last  gun  is  the  victory  to 
be  accounted,  nor  is  the  smallest  boy  who  touches  off  a 
fire-cracker  to  be  held  responsible  for  the  entire  Fourth  of 
July  hubbub.  If  there  is  accurately  a  producer  upon  the 
margin,  the  market  price  must  coincide  with  his  cost;  but 
neither  the  point  of  adjustment  nor  the  producer  at  this 
point  is  the  determinant  of  price.  True  it  is  that  if  he  were 
not  in  the  case,  the  price  would  have  been  other;  but  so  is 
this  true  of  all  the  other  producers  respectively.  The  mar- 
ginal item  of  supply  is  one  among  the  whole  number  of 
items  and,  as  such,  has  its  part  in  the  resulting  adjustment, 
but  it  is  the  entire  supply  in  equilibrium  with  the  entire 
demand  that  gives  the  market  adjustment.  It  is  true  that 
the  added  weight  of  the  marginal  item  has,  in  strict  theory, 
moved  the  price  from  one  point  to  another,  but  the  basis 
upon  which  this  effect  is  worked  and  the  situation  which  it 
modifies  are  the  results  of  thousands  of  other  units  of 
supply  in  face  of  thousands  of  offers. 

At  the  most,  then,  price  is  to  be  understood  not  as  fixed 
by  marginal  cost  but  as  commensurate  with  marginal  cost. 
Who  shall  produce  or  who  withdraw  is  for  the  most  part  a 
result  of  price,  and  only  in  the  smallest  degree,  as  putting 
so  to  speak,  a  fine  edge  upon  the  price,  a  causal  fact.  To 
claim  for  the  marginal  item  either  of  demand  or  of  supply, 
or  for  both,  the  function  of  price  determination  parallels 
the  case  of  the  fly  in  Aesop's  tale  who  sat  on  the  axle  tree 
of  the  chariot  and  said,  "What  a  dust  do  I  raise !" 

The  truth  of  the  case  appears  to  be  as  follows :  There 
are  margins  of  many  and  various  sorts,  all  important  to  the 
problem  of  supply.  Prices  of  agricultural  products  are  com- 
mensurate with  cost  at  the  extensive  land  margin,  but 
equally  so  with  cost  at  the  capital-goods  margin.  So  also 
of  the  intensive  margin,  of  the  day's-end  fatigue  or  recrea- 
tion margin,  and  of  the  alternative-opportunity  margin. 
Each  of  these  margins  stands  as  a  fact  or  an  influence  for 


RENT  AND  COST  275 

the  limitation  of  supply;  the  refusal  price,  the  "necessary 
price,"  at  each  of  these  margins  is  the  market*  price.^" 

But  some  of  these  margins  are  of  the  distinctly  personal 
sort,  as,  for  example,  the  fatigue  and  the  opportunity  mar- 
gins ;  nor  is  there  the  possibility  of  any  instrument  margin, 
excepting  as  through  the  relation  of  the  instrument  to  the 
entrepreneur's  personal  activity,  as  an  aspect  of  the  entre- 
preneur problem,  and  as  an  expression  of  the  judgment  and 
choice  of  the  entrepreneur  fact  in  production. 

Any  change  in  price  will  involve  a  rearrangement  in  the 
entrepreneur  complex  or  group  of  productive  powers,  a 
readjustment  or  realignment  of  his  productive  forces  and 
agents.  At  the  intensive  margin  of  effort,  and  commonly 
at  the  intensive  margin  of  utilization  of  his  instru- 
ments and  agents,  each  and  every  entrepreneur  is 
marginal ;  that  is  to  say,  not  all  of  his  product  is  equally 
near  to  the  margin  ;  he  has  different  costs  for  different  incre- 
ments of  product.  With  falling  prices  any  entrepreneur 
may  transfer  part  or  all  of  his  lands  to  other  products,  or 
may  sell  off  part  or  all  of  his  capital  goods,  or  reduce  his 
labor  investment,  or  restrict  his  loan-fund  borrowing;  or  he 
may,  leaving  part  or  all  of  his  investment  undisturbed, 
transfer  part  or  all  of  his  personal  activity  to  his  next  most 
attractive  alternative ;  or  he  may  completely  abandon  the 
old  line  of  production.  In  this  case  of  abandonment  also, 
he  and  his  capital  may  hold  together  as  one  productive 
group  or  complex,  or  may  scatter  into  various  industries ; 
with  falling  profits,  and  possibly  with  failing  pleasure  or 
interest  in  the  business,  or  at  the  approach  of  old  age  or  of 

'"  In  the  main,  of  course,  whether  any  man  is  marginal,  or  at  what 
point  in  his  production  he  reaches  a  margin,  is  the  result  of  the 
objective  conditions  that  he  has  to  face.  Each  margin  is  thus  rather  the 
effect  of  price  than  the  cause  of  it ;  the  total  situation  is  directive  of 
each  person  in  it,  who  in  turn  himself  helps  to  make  the  situation. 
Each  person  must  be  recognized  as  in  his  measure  contributing  toward 
the  total  situation.  Cost  has  thus — and  precisely  at  this  point — to  do 
with  price.  If  there  is  confusion  in  thinking  of  any  particular  fact  as 
at  the  same  time  both  cause  and  effect,  let  one  imagine  himself  as 
jumping — the  last  person — upon  a  crowded  raft,  and  sinking  with  it ; 
does  one  sink  the  others  or  do  they  sink  him? 


J 


276  VALUE  AND  DISTRIBUTION 

ill  health,  he  may  decide  to  retire  from  productive  activity, 
reducing  his  possessions  to  the  form  of  loan-fund  capital. 
But  whatever  may  be  the  modifications  which  result,  they 
will  come  about  through  him  as  a  man  marginal  in  some 
or  all  of  his  activities,  and  no  instrument  will  be  marginal 
excepting  in  its  relation  to  him.  And  no  one  of  all  his 
possible  margins,  and  no  total  of  all  the  difTerent  margins 
of  all  the  different  entrepreneurs,  will  be  price-determining 
or  even  price-influencing  except  to  the  degree  that  supply 
undergoes  modification  and  to  the  extent  that  supply  is  an 
influence  in  the  fixation  of  price. 

As  an  entrepreneur  problem,  then,  all  outlays  are  ele- 
ments of  cost;  and  personal  preferences,  repugnancies,  con- 
siderations of  climate,  neighborhood,  home  ties,  national 
prejudice,  wholesomeness,  cleanliness,  good  repute — all  are 
elements  in  cost  to  the  extent  that  they  serve  to  limit  supply, 
the  cost  problem  with  reference  to  each  man,  and  thereby 
to  any  instrument  or  agent  under  his  control,  being  simply 
and  solely  to  determine  the  point  at  which  supply  in  differ- 
ent quantities  can  be  had  from  him,  and  the  degree  and  the 
extent  of  his  elasticity  in  production  with  changes  in  price. 
And  it  is  as  one  among  all  the  other  cost  influences,  but 
commonly  as  the  influence  of  paramount  importance,  that 
opportunity  cost  acquires  significance  in  the  value  problem. 
Cost  is  simply  the  money  expression  of  the  total  of  resist- 
ance to  the  entrepreneur's  production. 

It  is  evident,  therefore,  that  wages,  interest,  and  rent 
are,  from  one  point  of  view,  income,  but  to  the  extent  that 
they  are  received  from  entrepreneurs,  are  costs  to  entre- 
preneurs. X'alue  and  distribution  are  therefore,  as  has  been 
said,  merely  different  aspects  of  the  same  problem. 

It  is,  however,  an  easy  inference,  but  none  the  less  a 

mistaken  ope,  to  conclude  that  costs  are  equal  to  value,  that 

I    is,  that  all  of   the   product   is   distributed   within   the   cost 

category.      All    excepting   the    marginal    items    of    product 

afford  to  entrepreneurs  a  surplus  above   cost — producers' 


RENT  AND  COST  277 

quasi-rents,  occupation  differentials.  Of  this  entrepreneur 
remuneration,  only  a  part  is  necessary  remuneration — mini- 
mum profit.  All  of  the  producers'  differentials,  personal 
quasi-rents,  fall  within  wages  of  superintendence,  profit  in 
the  broader  sense,  but  not  cost  elements  in  profit. 

The  problem  of  each  independent  producer — each  entre- 
preneur— is  how  through  one  or  another  combination  of  the 
productive  energies  at  his  disposal — land,  capital,  hired 
labor,  and  his  own  activity — to  obtain  the  results  most 
desirable  to  himself.  Both  costs  and  distributive  shares 
stand,  therefore,  as  entrepreneur  adjustments.  Each  human 
being  has  before  him  to  decide,  in  view  of  his  peculiar 
situation  and  adaptation,  whether  he  shall  be  an  entre- 
preneur, a  purchaser  of  productive  powers,  a  combiner 
and  adjuster  of  productive  energies,  or  whether  he  shall  sell 
his  own  productive  energy  to  another,  shall  be  a  hired  item, 
a  mere  instrument,  like  the  land  or  the  draught  horse.  ^_The 
wage-earner  differs  from  the  draught  horse  only  by  the 
fact  that  the  wage-earner  may  become  an  independent  pro- 
ducer or  an  employing  entrepreneur./  As  wage-earner  he 
sells  his  productive  power  precisely  as  the  capital-owner  or 
the  land-owner  sells  the  productive  efficiency  of  the  things 
that  he  controls."     As  far  as  the  entrepreneur's  personal 

"  All  of  this,  of  course,  conceives  cost  as  an  entrepreneur  computa- 
tion. Were  it  here  important,  it  would  doubtless  be  possible  to  inquire 
into  cost  as  looked  at  from  the  point  of  view  of  the  wage-earner ; 
only  that  this  cost  would  not  refer  to  the  cost  of  the  produced  com- 
modity, but  only  to  the  cost  to  the  laborer  of  his  labor  pain  or  of  the 
remuneration  for  it.  This  cost  might  be  one  of  labor  pain  or  of  dis- 
placed recreation  or  both  ;  or  if,  as  is  more  commonly  the  case,  not 
leisure  but  another  sort  of  work,  or  the  same  kind  of  work  under 
another  employer,  were  the  displaced  fact,  the  cost  would  be  one 
within  the  usual  opportunity  category. 

For  purposes  of  investigating  the  causes  of  the  labor  situation  in 
which  the  employer  is  placed  and  in  which  his  costs  are  to  be  com- 
puted, there  is  doubtless  importance  in  the  laborer  point  of  view  and 
manner  of  analysis.  But  this  investigation  is  on  the  level  of  the  expla- 
nation of  entrepreneur  costs  ;  for  the  entrepreneur  the  cost  question  is 
one  of  how  much  and  not  why.     His  costs  are  as  they  are. 

But  it  is  still  to  be  noted  that  the  mere  item  of  outlay  may  be 
quite  misleading  as  measure  of  cost.  Cost,  it  must  be  remembered,  is 
that  total  which  the  market  price  must  remunerate  if  production  is  to 
be  maintained  ;   it  may  then  well  be  true  that  for  producing  an  output 


278  VALUE  AND  DISTRIBUTION 

remuneration  is  concerned,  it  suffices  to  say  that  if  he 
cannot  anywhere,  after  his  different  outlays,  retain  for  him- 
self a  return  as  desirable  (not  necessarily  as  large)  as  that 
which  he  could  control  through  wage  service,  wage  service 
will  be  his  alternative.  And  thus  again  we  return  to  the 
fact  that  all  these  different  outlays, — rent,  interest,  and 
wages  among  them, — are  elements  of  cost,  that  is  to  say, 
form  part  of  that  total  for  which  the  market  price  must 
serve  as  indemnity  if  the  production  of  the  entrepreneur  is 
not  to  diminish  or  cease. ^- 

But  after  all  is  said,  there  is  still  an  aspect  of  truth  in 
Ricardo's  dictum  that  "corn  is  not  high  because  rent  is 
paid,  but  rent  is  paid  because  corn  is  high If  the 

of  105  the  necessary  outlay  is  only  100,  but  that  this  same  outlay  else- 
where applied  may  control  a  return  of  102;  in  such  case,  the  alterna- 
tive productiveness  of  102  and  not  the  smaller  100  item  of  outlay  must| 
be  accepted  as  the  cost. 

"  Acquiescence  in  the  traditional  terminology  of  the  cost  discus- 
sion, with  its  categories  of  rent,  interest,  wages,  and  profits,  has  seemed 
to  be  imperative  here  in  view  of  the  particular  issue  under  discussion 
— the  rent-cost  problem — and  of  the  exigencies  of  an  intermixed  expo- 
sition and  criticism. 

So  important  is  the  doctrine  of  this  chapter,  especially  with 
regard  to  the  multiplicity  of  the  different  margins,  and  their  nature, 
so  great  the  danger  of  misinterpretation,  and  so  imperative  the  result- 
ant call  for  all  possible  expositional  clarity,  that,  even  at  the  certainty 
of  some  repetition,  a  restatement  of  the  doctrine  appears  to  be  desir- 
able ;  a  changed  direction  of  approach  will,  in  some  measure,  require 
the  anticipation  of  certain  important  steps  in  the  general  argument. 

The  marginal  cost  of  product  coincides  reasonably  accurately  with 
the  expense  at  the  extensive  margin,  or  with  the  displacement  either 
of  agricultural  or  of  non-agricultural  product  at  the  extensive  margin, 
or  with  the  displacement  either  of  agricultural  or  of  non-agricultural 
product  at  the  intensive  margin  :  and  also,  for  each  and  every  use  of 
each  and  every  grade  of  land,  there  is — or  may  be — a  question  of  some 
alternative  use,  the  displacement  of  which  would  be  refused  were 
prices  in  the  first  use  appreciably  to   fall. 

Here  are  surely  margins  enough  ;  but  there  are  more.  We  may  as 
well  talk  of  the  extensive  margin  being  an  interest  or  a  wage  margin 
as  a  land  margin.  So,  at  the  intensive  or  at  the  alternative  margin,  the 
choice  is  really  whether,  under  the  conditions,  it  is  as  gainful  to  apply 
more  labor  or  capital  here  as  elsewhere.  Still  further,  in  each  of  these 
problems,  as  in  practically  every  problem,  capital  and  labor  come,  as 
regards  each  other,  to  an  indifference  of  productive  applications.  Evi- 
dently the  margins  are  multitude ;  and  all  that  we  may  say,   from   the 


RENT  AND  COST  279 

high  price  of  corn  were  the  effect  and  not  the  cause  of 
rent,  prices  would  be  proportionally  influenced  as  rents 
were  high  or  low,  and  rent  would  be  a  component  part  of 

cost  point  of  view,  is  that  any  one  of  the  agents  may,  through  a 
change  in  its  costs,  become  the  margin-changing  agent — that  is  to  say, 
the  agent  deciding  the  producer  to  modify  or  abandon  his  line  of 
productive   activity. 

This  amounts  to  saying  that  over  against  the  general  situation, 
vvhich  the  cultivator  does  not  control,  and  the  changes  in  which  express 
themselves  as  fluctuations  in  the  volumes  and  in  the  values  of  produc- 
tion goods,  is  the  cultivator,  whose  problem  is  always  to  find  that  line 
of  productive  activity  the  conditions  of  which  are,  relatively  to  him,  by 
virtue  of  his  peculiar  adaptations,  his  efficiency,  his  preferences,  and 
his  equipment  of  goods,  most  advantageous  or  least  resisting. 

Viewed,  then,  as  a  whole,  the  aggregate  human  demand  for  goods 
relatively  to  one  another  being  assumed,  and  the  aggregate  human 
efficiency  for  production  in  its  actual  environment  of  land  and  capital 
being  taken  for  granted, — and  all  this  in  connection  with  a  system  of 
production  functioning  under  the  direction  of  independent  and  compet- 
ing human  agents,  each  engaged  in  the  attempt  to  find  for  himself  the 
most  advantageous  line  of  application  of  the  productive  powers  and 
agencies  under  his  control, — market  value  emerges  as  a  point  of  adjust- 
ment or  of  equilibrium  for  all  the  forces  and  influences  engaged. 
Normal  value  is  the  point  at  which,  if  conditions  remained  the  same, 
the  equilibrium  would  be  permanent ;  changing  values  are  merely  points, 
in  a  moving  equilibrium,  reached  but  only  temporarily  held,  under  these 
readjustments  and  realignments  of  productive  activity,  brought  about 
by  the  changing  conditions  of  demand,  of  processes,  and  of  supplies  of 
productive  agents. 

Man  is  to  be  conceived  as  the  subject  and  the  center  of  economic 
science  ;  his  environment  of  land  and  capital  (and,  for  the  individual, 
of  his  fellows)  as  his  opportunity  ;  his  industrial  product  as  his  remun- 
eration ;  his  economic  activity  as  his  attempt  to  produce  and  to 
exchange  this  product  along  the  lines  of  least  resistance  (sacrifice). 
Normal  price  is  to  be  conceived  as  the  point  of  least  resistance,  not 
only  for  the  buyers  and  sellers  directly  engaged  in  any  employment, 
but  also  for  producers  in  other  employments  seeking  those  lines  of 
activity  affording  the  most  satisfactory — or  least  unsatisfactory — 
remunerations.  "Market  prices  are  found  to  fluctuate  in  either  direc- 
tion about  these  normal  or  ideal  prices,  and  cannot,  in  the  competitive 
adjustment  of  sacrifice,  long  or  widely  depart  therefrom.  In  short, 
the  normal  price  is  that  price  at  which  no  producer  can,  to  his  own 
thinking,  better  employ  himself  in  some  other  line  of  production. 
Prices  generally  would  stand  at  their  normal,  if  no  producer  or  con- 
sumer could  to  his  own  thinking  advantageously  change  his  manner  of 
economic  action.  But,  like  the  ocean,  market  values  have  no  rest. 
Prices  ripple  and  wave  above  or  below  their  ideal  level,  as  desires  and 
appetites,  opportunities  and  abilities,  slowly  or  rapidly  change  in  force  ; 
yet  ....  none  the  less  ....  confess  the  controlling  power  of 
this  level  as  truly  as  do  crest  and  trough  their  subjection  to  the  ideal 
level  of  the  sea." — Davenport,  op.  cit.,  p.  104. 

But   men   as    employees    are   passive   facts,   mere   agents   under   the 


28o  VALUE  AND  DISTRIBUTION 

price."  ^^  But,  obviously,  these  same  remarks  apply  equally 
well  to  wages  and  interest.  Wages  are  high  all  along  the 
line  because,  in  view  of  the  high  productive  powers  of 
V  labor,    entrepreneurs'    competitions    are    placing    a    high 

market  price  upon  that  labor;  thus  the  production  of  any 
particular  commodity  has  to  face  this  high  wage-cost  level, 
and  must  recoup  itself  for  these  wage  costs  through  a 
corresponding  level  of  prices. 

It  is  even  so  of  any  agricultural  product ;  the  supply  of 
land,  relative  to  the  demand  for  agricultural  products  in 
general,  gives,  through  entrepreneur  bidding,  the  rental 
values  to  different  lands ;  this  rental  value  stands  as  a 
datum  of  cost  for  the  production  of  any  particular  agri- 
cultural product.  But  in  ultimate  analysis,  it  still  stands 
as  true  that  it  is  not  the  rent  that  makes  the  prices  high, 
but  the  scarcity  of  land. 

The  real  and  the  recurrent  difficulty  in  all  of  this  is  that 
costs  and  the  relations  of  cost  to  value  do  not  touch  the 
ultimate  causes  in  the  case.  Entrepreneur  computations 
take  all  items  of  outlay  cost  as  data,  as  definitive,  funda- 
mental facts,  which,  for  any  other  than  the  entrepreneur 
point  of  view,  they  indubitably  are  not. 

All  of  this,  however  will  get  clearer  with  a  change  in 
point  of  view. 

A  collectivist  society,  having  no  rentals  to  pay,  could 
compute  none  as  facts  of  cost.  In  case  the  improvement 
or  upkeep  of  land  were  under  consideration,  the  sole  ques- 
tion would  be  whether  the  energies  and  materials  applied 
could  not  be  better  applied  elsewhere.  The  sole  question 
in  the  use  of  already  existing  land  opportunities  for  any 
particular  product  would  be  whether  these  opportunities 
could  not  better  be  used  for  something  else.  The  only 
resistance  to  the  current  production  would  be — so  far  as 

direction  of  managing  producers,  and  are  therefore  only  potentially 
directing  forces.  The  problem  of  production  and  of  marginalship  is, 
accordingly,  an  entrepreneur  problem. 

"  Ricardo,  Political  Economy,  chap,  ii,  sec.  29. 


RENT  AND  COST  281 

concerned  the  land — the  displacement  of  something  else. 
That  is  to  say,  the  collectivist  computation  of  land  costs 
would  be  entirely  one  of  opportunity  cost.  Were  the  land 
of  a  sort  adapted  to  only  one  product,  a  cranberry  swamp 
as  a  possible  example,  no  cost  could  be  computed  for  the 
land  use.  Of  such  land  it  might  be  said  that  its  utility  was 
high  because  its  products  were  highly  useful ;  but  land-ivise 
the  utility  product  would  have  no  cost.  But,  with  land  of 
alternative  applications,  the  displaced  product  would  stand 
as  the  land  cost  of  that  product  actually  produced.  If  the 
displaced  utility  were  great,  the  produced  utility  would  also 
have  to  be  great  or  be  foregone.  While  it  would  doubtless 
be  true  that  the  utility  of  the  land  could  be  ascribed  to  its 
productiveness  for,  say,  corn,  it  would  none  the  less  remain 
true  that  the  corn  utility,  at  below  a  certain  measure, 
would  not  be  pemiissible  of  acceptance,  because  of  the  high 
utility  of  the  land  as  reflected  from  its  adaptation  to 
another  product — wheat,  for  example. 

For  competitive  society,  Ricardo's  doctrine  should, 
therefore,  be  revised  to  run  something  as  follows :  Ulti- 
mately, corn  is  not  high  because  rent  is  paid  for  corn  land, 
but  rent  must  be  paid,  because,  to  command  the  land  for 
corn,  a  rental  possible  from  some  other  product  has  to  be 
refused. 

But,  so  formulated,  the  doctrine  is,  in  truth,  rather 
transitional  between  the  collectivist  and  the  competitive 
points  of  view  than  fully  competitive ;  it  retains,  indeed, 
strong  traces  of  its  collectivist  origin.  For,  under  com- 
petitive conditions,  not  that  rent  barely  sufficient  to  dis- 
place the  alternative  use  is  the  land  cost,  but  the  rent  really 
paid  in  the  actual  use. 

Transfer  the  case  fully  into  the  entrepreneur  competi- 
tion, and  all  this  becomes  clear.  Land,  being  limited  in 
quantity,  is  therefore  cultivated  to  an  extensive  margin. 
The  limitation  upon  the  land  supply  expresses  itself  under 
the  guise  of  rent  for  all  lands  or  powers  of  land  above  the 
margin.     Rent  is  fixed  by  the  bidding  of  entrepreneurs  in 


r 


282  VALUE  AND  DISTRIBUTION 

view  of  the  fact  that  a  possessor  of  the  better  land  is,  by- 
virtue  of  his  rent  outlay,  excused  from  an  approximately 
correspondingly  high  outlay  for  labor  and  instruments  of 
production.  Rent  is  thus  an  item  in  entrepreneur  cost,  and 
is  causal  in  the  same  sense  that  other  outlays  are  causal — 
in  the  sense,  that  is  to  say,  that  this  rent  is  the  form  under 
which,  in  competitive  production,  a  shortage  of  land 
expresses  itself.  The  rent  is  a  necessary  outlay,  or,  if 
avoided,  must  be  avoided  at  a  correlative  increase  of  outlay 
in  other  directions.  But,  ultimately  speaking,  prices  are 
not  high  because  rent  is  paid,  but  because  of  the  limitation 
upon  the  supply  of  land  which,  by  driving  cultivation  to 
poorer  land  powers,  must  give,  whether  under  coUectivist 
or  under  competitive  production,  a  distinct  advantage  to 
all  cultivation  upon  non-marginal  lands.  But,  under  com- 
petitive production,  these  differential  advantages  take  the 
form  of  property  rights  for  their  possessors ;  the  land 
acquires  the  aspect  of  a  competitive  agent  affording  a 
valuable  opportunity,  by  the  use  of  which  a  cost  of  produc- 
tion could  be  obtained  lower,  were  the  rent  not  computed, 
than  other  costs,  and  lower  than  the  market  value  of  the 
product;  thus  the  rent  comes  necessarily  to  be  paid. 

But,  ultimately  speaking,  the  rent  does  not  increase 
the  price ;  by  the  very  fact  that  the  land  is  limited  the  high 
price  is  unavoidable.  Unquestionably,  were  the  land  sup- 
ply greater,  the  rent  would  be  lower,  and  the  prices  lower ; 
but  mark,  not,  in  last  analysis,  lower  because  the  rent  is 
lower,  but  because  conditions  have  come  to  exist,  which, 
in  making  the  lower  price  possible,  have  made  the  high 
rent  impossible.  The  rent  cost  and  the  relation  of  it  to 
value  are  mere  expressions,  in  terms  of  entrepreneur  com- 
petition, of  causes  underlying  and  ultimate — environmental 
facts,  with  which  production  must  get  along  as  best  it  may. 

The  foregoing  conclusions  lead  directly  to  the  con- 
clusion that,  from  certain  points  of  view  and  for  certain 
purposes,    it   is    necessary    to    recognize   as   the    true    cost 


RENT  AND  COST  283 

determinants  these  environmental  facts,  the  situation  facts, 
as  they  will  henceforth  be  called.  What  this  term  means 
may  possibly  become  clearer  with  a  review  of  one  of 
Ricardo's  comrade  controversies  with  Malthus : 

Malthus  had  argued  that  rent  can  arise  only  when  land  \/ 
is  fertile  enough  to  yield  a  surplus  above  the  subsistence  of 
the  laborer.  For  our  present  purposes,  and  for  all  the 
purposes  of  Malthus'  argument,  and  in  closer  conformity 
with  later  theory,  this  term  subsistence  should  better  be 
interpreted  in  the  sense  of  zvages,  the  doctrine  then  run- 
ning to  the  effect  that  unless  the  yield  will  more  than  suffice 
to  pay  the  wages,  there  can  be  no  rent  collected. 

But  under  either  interpretation  it  is  clear  that  were  all 
land  sufficiently  poor — and  all  equally  poor — and  yet,  with 
all  of  its  badness,  unlimited  in  quantity,  there  could  be  no 
rent.  Thus  Malthus'  position  sums  up  as  follows :  Two 
conditions  must  concur  before  rent  can  emerge,  viz.,  that 
there  be  land  good  enough  to  yield  this  surplus,  and  yet 
that  there  be  a  scarcity  both  of  this  and  of  better  land. 

These  better  lands — what  there  were  of  them — Malthus 
regarded  as  a  source  of  material  well-being,  a  social  asset; 
rent  is  the  market  expression  of  this  social  good  fortune. 
True,  it  might  be  objected  that,  with  this  land  in  the 
possession  of  private  owners,  the  attendant  advantages 
must  accrue,  not  to  society  in  general,  but  to  these  owners ; 
but,  even  so,  the  owners  must  be  admitted  to  be  a  part  of 
society ;  and  more  than  this,  not  all  the  benefit  could  be 
monopolized  by  the  owners ;  as  a  condition  to  the  receipt  of 
their  rents,  the  land  must  be  utilized,  with  a  resulting 
larger  supply  of  products  and  with  lower  prices  to  con- 
sumers. 

But  Ricardo  placed  the  emphasis  differently — not  upon 
the  "I  have"  aspect,  but  upon  the  "Oh,  had  I."  The  exist- 
ence of  rent  he  interpreted  as  an  expression  of  the  nig- 
gardliness of  nature,  the  evidence  of  the  difficulty  under 
which  society  is  laboring  in  getting  a  living.  Out  of  this 
bad  case,  progressively  getting  worse,   the  land-owner  is 


284  VALUE  AND  DISTRIBUTION 

acquiring  a  progressively  larger  deduction  from  what 
others  can  enjoy — that  is,  out  of  a  national  dividend  griev- 
ously restricted  at  the  best,  is  acquiring  not  merely  an 
unearned  increment,  but  an  increment  received  out  of  the 
social  distress,  and  greater  as  this  distress  is  greater. 

Here,  as  mostly  elsewhere  in  economics,  the  Ricardian 
temper  and  mood  and  point  of  view  have  carried  the  day; 
and  not  without  justification,  for  Ricardo  was  right.  But 
so  was  Malthus.  Given  the  ideal  endowment  of  piety,  with 
a  sufficiently  thankful  heart,  one  has  it  always  at  hand  to 
render  thanks  that  things  are  no  worse:  "Every  misery 
we  miss  is  a  new  blessing,  and  therefore  let  us  be  thank- 
ful," spake  the  completely  genial  fisherman.  And  so,  in 
substance,  Malthus  was  thinking  how  much  better  things 
were  than  if  they  had  been  worse;  Ricardo,  of  how  much 
better  they  might  have  been  if  they  had  not  been  so  bad. 

But  as  a  mere  distribution  fact,  as  distinguished  from  a 
production  fact,  Malthus'  view  appears  to  present  the  better 
doctrine.  What  land  there  is,  is  wealth,  as  clearly  as  what 
capital  there  is.  As  a  question,  however,  of  the  ethics  of 
institutional  distribution,  the  problem  of  the  unearned 
increment,  the  right  of  property  in  the  rent  differential, 
Ricardo's  view  has  something  more  to  say  for  itself. 

But  as  a  problem  of  costs  in  competitive  production, 
the  two  views  need  not  have  differed  in  application ; 
Ricardo  misapplied  his  doctrine.^* 

But  it  is  none  the  less  important  to  recognize  that  the 
land  and  the  capital  and  the  labor  do  not  make  the  costs 
and  the  value  of  the  products   high,  but  low ;   the  more 

"  On  the  main  issue,  Senior  sided  for  the  most  part  with  Malthus. 
Ricardo  had  written  (Principles,  p.  53)  :  "The  labor  of  nature  is  paid, 
not  because  she  does  much,  but  because  she  does  little.  In  proportion 
as  she  becomes  niggardly  in  her  gifts,  she  exacts  a  greater  price  for  her 
work.     Where  she  is  munificently  beneficent  she  always  works  gratis." 

Senior  replies :  "Mr.  Ricardo  seems  to  have  forgotten  that  the 
quality  which  enables  land  to  afford  rent,  namely,  the  power  of  pro- 
ducing the  subsistence  of  more  persons  than  are  required  for  its 
cultivation,     is     an    advantage    without    which     rent    could    not     have 

existed That   we   have   in  this   country   perhaps   a   million    of 

acres  capable  of  producing,   with   average   labor,    forty   bushels  of  corn 


RENT  AND  COST  285 

agents  and  instruments,  relatively,  especially  adapted  to 
particular  products,  the  greater  the  relative  supply  of  these 
products  and  the  lower  the  price.  In  fact,  unless  the  case 
be  one  of  complete  indifference,  no  producer  employs  any 
particular  agent  or  instrument,  as  against  another,  except- 
ing as  a  saving  of  expense  is  promised  thereby ;  all  produc- 
tion goods  are,  for  their  particular  products,  value- 
diminishing  influences.  It  is  the  scant  supply  of  land  and  of 
capital  and  of  adapted  labor,  and  not  their  presence,  which 
explains  the  relative  scarcity  of  the  product,  its  high  value, 
the  relatively  high  hire  of  the  productive  factors,  and  the 
correspondingly  high  capitalized  value  of  such  of  them  as 
can  be  capitalized.  As  a  question  of  costs,  rent,  interest, 
and  wages  are,  therefore,  not  ultimate  explanations  of 
value.  The  fundamental  determinant  is  "situational,"  as 
connoting  the  entire  case  on  the  cost  side,  the  original 
environment,  the  volume  and  kinds  of  saved  wealth,  the 
qualities  and  adaptations  of  men,  the  degree  and  the  direc- 
tion of  development  in  the  sciences  and  arts  of  production. 
Entrepreneur  outlay  costs  are  the  values  placed  by  com- 
petitive bidding  upon  the  various  opportunities  and  auxil- 
iaries in  the  productive  process,  in  view  of  the  market 
values  of  the  resulting  products. 

But  that  the  market  remuneration  of  any  productive 
fact  is  a  derivative  from  its  value-producing  power,  in 
view  of  the  existing  conditions  of  demand  and  of  supply, 
does  not  imply  that  this  remuneration  is  either  equal  to  its 
contribution  or  is  proportional  to  it,  or,  indeed,  that  the 
precise  amount  of  its  contribution  is  ascertainable,  or  that, 

an  acre,  is  a  benefit ;  that  we  have  not  more  than  a  million  such  acres, 
is  an  evil.  That  the  average  amount  of  what  an  agricultural  laborer 
produces  much  exceeds  what  is  absolutely  necessary  for  the  subsistence 
of  an  agricultural  family,  is  a  benefit.  That  the  extent  of  our  fertile 
land,  and  the  amount  of  our  capital,  in  proportion  to  our  population, 
are  not  sufficient  to  enable  him  to  consume,  directly  or  indirectly,  for 
his  own  advantage  and  that  of  his  family,  all  that  he  produces,  is  an 

evil To    produce    rent,    both    the    benefit    and    the    evil    must 

coexist.  The  one  occasions  rent  to  be  demanded  ;  but  it  is  the  other 
that  enables  it  to  be  paid.  Mr.  Ricardo's  attention  seems  to  have  been 
confined   to    the    evil." — Senior,   Political   Economy,    p.    138. 


286  VALUE  AND  DISTRIBUTION 

if  ascertainable  in  its  relation  to  any  one  entrepreneur, 
this  contribution  would  not  be  a  different  one  for  each  dif- 
ferent competing  entrepreneur.  In  truth,  the  cost  to  any 
entrepreneur  is  rarely,  if  ever,  the  precise  equivalent — were 
this  quantum  an  ascertainable  one — of  the  value  signifi- 
cance of  the  productive  factor  to  him ;  otherwise  there 
could  be  no  non-marginal  entrepreneurs,  and  no  producers' 
quasi-rents.  And  even  at  the  margin  the  equivalence  is 
really  impossible  of  establishment ;  complete  proof  of  this 
last  must,  however,  be  postponed  to  later  aspects  of  the 
argument. 

Recurring  again  to  the  Ricardian  doctrine  as  to  the 
relation  between  land  margins  and  costs,  a  more  important 
and — fundamentally — a  more  decisive  argument  remains 
to  be  presented:  There  is  no  land  margin  of  the  sort  con- 
templated in  the  Ricardian  doctrine. 

Productive  agents  of  countless  kinds,  labor  of  different 
grades  of  skill  in  all  the  different  trades  and  subdivisions  of 
trades,  capital  goods  of  all  sorts  and  grades  for  number- 
less different  purposes,  lands  varying  in  climatic  and  chemi- 
cal and  positional  qualities,  adapted  to  countless  different 
uses  and  products,  and  in  all  conditions  of  original  or 
acquired  fertility  and  exhaustion,  and  with  all  kinds  of 
improvement  and  modification  through  capital  and  through 
labor — are  one  and  all,  through  competitive  bidding, 
reduced  to  a  certain  sort  of  homogeneity,  that  is  to  say, 
to  the  homogeneity  of  market  price.  But  all  the  differ- 
ences between  the  different  productive  agents  and  instru- 
ments still  persist.  That  all  are  subjected  to  a  common 
price  measure,  which  merely  means  that  all  are  bought  and 
sold,  does  not  obliterate  these  differences  or  reduce  all  pro- 
ductive facts  to  an  abstract  fund.  In  truth,  money  and 
loan  fund, — deferred  options  of  disposing  of  wealth  and 
services,  suspended  purchasing  power, — are  the  only  cases  of 
abstractness  or  of  true  homogeneity  known  to  economic 
affairs.     We  have  already  had  some   occasion,   and   shall 


RENT  AND  COST  287 

later  have  yet  more,  to  notice  that  not  even  in  point  of 
utility  do  equal  market  values  express  or  suggest  equiva- 
lence. That  the  same  man  pays  $500  for  a  furnace,  a  further 
$500  for  a  piano,  and  a  third  $500  for  a  back  kitchen  to 
his  house,  does  not  point  to  any  actual  or  expected  equality 
of  service  from  the  different  lines  of  expenditure;  still  less 
do  equal  outlays  by  different  men. 

Nor  even  by  an  appeal  to  margins  is  the  case  for 
equality  made  stronger.  That  each  of  these  three  uses  is 
marginal  in  the  sense  of  being  the  last  item  that  one  would 
purchase  at  the  price,  may  be  merely  derivative  from  the 
fact  that  each  is  the  last  that  one  would  purchase  at  any 
price;  and  it  may  still  remain  true  that  one  would,  if 
necessary,  have  paid  indefinitely  more  for  each  of  the  three 
things  than  was  actually  paid. 

And  still  clearer  is  it  that  as  between  dififerent  men — 
simply  because  they  are  different  and  essentially  incom- 
parable in  their  mental  states,  to  say  nothing  of  differences 
of  wealth  and  poverty,  sickness  and  health,  culture  and 
crudity,  vivid  feeling  and  obtuse  feeling — all  utility  com- 
parisons fail  utterly  and  hopelessly ;  there  is  no  homo- 
geneity possible  here  but  this  of  purchasers'  offer  or  of 
purchasers'  actual  payment, — either  one  a  mere  price  homo- 
geneity. 

And  all  of  this  holds — and  this  is  our  point  of  goal — 
for  production  goods  as  truly  as  for  consumption  goods, 
though  admittedly  in  less  marked  degree.  Men  as  pro- 
ducers are  dissimilar,  not  merely  in  intelligence  and  in 
special  aptitude,  but  in  wealth,  in  credit,  and  in  degree  and 
quality  of  objective  material  equipment.  Production  goods 
take  on  a  different  relation  to  different  entrepreneurs 
accordingly  as  these  entrepreneurs  are  difTerent  in  their 
aptitudes,  their  purchasing  power,  their  lines  of  produc- 
tion. Even  were  all  goods  capable  of  being  distributed 
and  graded  into  stocks  of  similar  items,  these  differences  in 
entrepreneur  relation  would  still  exist.  But,  in  truth,  most 
goods  are  not  so  gradable ;  even  wheat  is  so  only  arbitrarily 


288  VALUE  AND  DISTRIBUTION 

and  by  overlooking  minor  dissimilarities  and  inequalities. 
Thus  the  purchaser  commonly  pays  less  for  things  than  his 
limit  price.  And  there  are  quasi-rents  of  production  as 
well  as  of  purchase  or  of  sale.  What  any  particular  hirer 
or  buyer  must  pay  for  any  particular  item  of  productive 
wealth  is — even  where  frictionless  competition  is  assumed 
— only  what  the  next  most  capable  bidder  is  willing  to  pay ; 
the  maximum  bid  of  the  buyer  in  question  is  very  prob- 
ably a  quite  appreciably  greater  sum ;  most  bargains  are 
concluded  within  an  appreciably  wide  intermediate  tract 
of  higgling. 

Applying  now  these  principles  to  the  land-margin  ques- 
tion, it  becomes  evident  that  the  margin  of  market  value 
and  the  margin  of  personal  service  do  not  and  cannot 
coincide.  With  the  especial  aptitudes  or  preferences  of 
one  man  for  intensive  farming,  and  of  another  for  exten- 
sive farming,  and  with  all  the  modifications  of  neighbor- 
hood preference,  birth,  associations,  family,  friends,  health, 
habit,  religion,  and  the  like,  it  is  not  at  all  certain  that  the 
man  upon  the  lowest-price  land,  or  upon  rentless  land,  if 
there  be  any,  could  not  and,  if  necessary,  would  not  pay 
more  than  he  pays.  When,  after  years  of  profitable  farm- 
ing and  contented  rent-paying  at  an  appreciable  sum,  the 
tenant  falls  on  death,  it  may  well  happen  that  no  new 
tenant  can  find  it  to  his  advantage  to  make  use  of  this  land 
on  any  terms.  Every  landlord  knows  that  the  rent  income 
depends  in  part  upon  the  tenant  and  upon  the  bargain ;  in 
every  rural  community  the  good  tenant  is  as  cordially 
sought  after  by  landlords  as  is  the  good  landlord  by 
tenants-  Never  is  the  payment  a  trustworthy  measure  of 
the  service  of  the  land  to  the  tenant,  or,  in  the  absence  of 
this  particular  tenant,  of  the  revenue,  under  an  alternative 
tenant,  to  the  landlord.  The  margin  of  occupation  is, 
then,  not  a  value  margin  ;  and  it  is  a  utility  margin  only 
with   reference  to  a  particular  cultivator;  the  margin  of 


RENT  AND  COST  289 

service   may  be   far  beyond  and  below  the   ragged,   saw- 
edged,  market-value  line  of  rental  payment. 

A  later  development  of  the  argument  will  serve  to  show 
that  precisely  here  must  fail  the  productivity  theory  of 
distribution.  The  remuneration  is  not  the  expression  and 
equivalent  of  the  value  productivity,  but  is  merely  the 
market  value  of  the  value  productivity.  But  all  this  must 
await  its  turn. 

It  thus  appears  that  the  riiarginal  producer  of  any 
agricultural  product  is  as  likely  to  be  upon  high-rent  land 
as  upon  rentless  land.  A  fall  in  price  is  as  likely  to 
direct  out  of  agriculture  and  into  some  non-agricultural 
employment  the  tenant  upon  the  better  land  or  the  capital 
upon  the  better  land  as  the  tenant  or  the  capital  upon  the 
low-priced  or  rentless  land. 

Nor  is  this  at  all  to  deny  that  rightly  understood  there 
is,  or  may  be,  such  a  thing  as  marginal  land,  land  which, 
to  the  most  capable  cultivator  of  it,  is  barely  worth  cultivat- 
ing upon  no-rent  terms ;  but  it  is  to  deny  that  this  service- 
less  land  and  rentless  land  are  necessarily  the  same  land ;  and 
especially  it  is  to  deny  that  a  fall  in  price  will  necessarily 
send  into  non-use  all  land  held  without  rent,  or  that 
there  is  any  such  relation  between  rentless  land  and  market 
price  as  is  indicated  under  the  Ricardian  doctrine.^' 

"  The  effects  of  a  price  fall  upon  land-holding  are  something  as 
follows : 

A  fall  in  the  value  of  any  one  agricultural  product  will  set  free 
some  land  for  use  in  the  production  of  other  agricultural  products ; 
and  when  the  redistribution  in  the  uses  of  land  has  completed  itself, 
its  final  effects  will  sum  up:  (i)  in  a  small  reduction  in  the  prices 
of  all  other  products:  (2)  in  the  same  total  of  effects  upon  land  rents 
in  general  as  would  follow  from  a  small  fall  in  the  value  of  agricultural 
products  in  general. 

Going  more  into  detail,  it  may  be  said  that  a  fall  in  the  price,  say, 
of  wheat,  will  have  as  result  a  rise  in  both  the  extensive  and  the 
intensive  margins  of  cultivation  ;  that  is,  there  will  occur  some  outflow 
of  labor  and  capita!  from  all  grades  of  wheat  land  into  other  employ- 
ments, both  agricultural  and  non-agricultural.  But  it  is  only  by  land 
somewhere  becoming  vacant  that  landlords  are  likely  to  lower  their 
rents.  Non-marginal  lands  will,  however,  remain  only  temporarily  out 
of   cultivation ;    less   than   the   old    rent    is  better   than    no    rent   at   all. 


290  VALUE  AND  DISTRIBUTION 

We  approach  now  a  question  which  has  been  much 
debated,  but  which  should  not,  at  the  present  stage  of  the 
discussion,  occasion  great  difficulty:  Does  the  rent  which 
land  is  worth  for  another  crop  enter  into  the  cost  of  the 
crop  actually  produced  ?  ^^ 

The  following  propositions  may  perhaps  now  be  taken 
either  as  proved  or  as  requiring  no  proof : 

The  rent  paid  for  land  used  for  wheat  is  a  part  of  the 
cost  of  production  of  the  wheat.  The  method  of  Marshall, 
Hyde,  and  Hollander,^^  of  appealing,  for  a  rentless  price- 
But  with  the  redistribution  of  holdings  and  of  lines  of  production,  some 
cultivators  having  abandoned  agriculture,  the  vacated  better  lands  will 
be  re-rented  to  cultivators  variously  selected.  No-rent  lands — or  lands 
as  near  to  this  as  cultivated  lands  ever  get — may  have  been  in  the 
possession  of  tenants  some  or  all  of  whom  could  afford  to  pay  an  appre- 
ciable rent ;  these  lands  and  their  tenants  may  be  undisturbed  by  the 
fall  in  price,  all  the  while  that  cultivators  may  have  been  moving  off 
from  better  lands,  driven  therefrom  by  the  inflexibility  of  landlords  in 
refusing  to  lower  the  rents,  or  induced  therefrom  by  the  overbalan- 
cing attractions   of  non-agricultural   employments. 

But  it  is  not  likely — indeed,  it  is  not  possible — that  the  vacated 
lands  be  taken  up  solely  by  cultivators  moving  up  from  the  poorer 
or  the  poorest  grades  of  land ;  as  rents  fall  and  cultivation  becomes 
less  intensive,  cultivators  will  turn  to  farm  larger  areas  of  land. 
The  final  adjustment  will,  then,  sum  up  at  something  like  this  ;  that  the 
marginal  cultivators — on  no  matter  what  grades  of  land — will  mostly 
have  abandoned  agriculture,  while  all  cultivators  will,  in  some  measure, 
have  diminished  by  marginal  reductions  their  output  per  acre;  the 
margin  of  cultivation,  both  extensive  and  intensive,  will  have  some- 
what risen  ;  the  methods  of  cultivation  will  have  moved  toward  a  less 
intensive  type, — another  way  of  asserting  some  measure  of  capital  out- 
flow ;  the  reduction  in  the  returns  of  agriculture  in  general  will  have 
distributed  itself  into  lower  rents  for  landlords,  lower  returns  upon 
the  capital  instruments  still  remaining  in  production,  and  very  slightly 
lower  personal  remunerations  for  the  human  factor  in  agricultural 
production. 

But  the  marginal  costs  for  different  products  will  still  be  the  costs 
at  the  personal  margin  on  no  matter  what  grades  of  land. 

"J.  S.  Mill,  Principles,  Book  III,  chap,  vi  ;  Jevons,  Theory  of 
Political  Economy,  Preface,  pp.  liii,  liv ;  Patten,  Theory  of  Dynamic 
Economics,  p.  78;  Hobson,  Economics  of  Distribution,  pp.  121-25; 
Macfarlane,  Value  and  Distribution,  pp.  130-35  ;  and  A.  S.  Johnson, 
Rent  in  Modern  Economic  Theory,  pp.  78-82,  are  among  the  different 
supporters  of  the  affirmative ;  see  Marshall,  Principles,  for  the  most 
authoritative  exposition  of  the  negative  argument ;  also,  A.  M.  Hyde, 
Journal  of  Political  Economy,  Vol.  VI,  No.  3   (June,  1898). 

"  Cf.  article  by  J.  H.  Hollander,  Quarterly  Journal  of  Economics, 
January,    1895. 


RENT  AND  COST  291 

fixing  cost,  to  the  intensive  margin  where  no  rent  is  earned 
or  paid,  is  fruitless ;  cultivators  at  the  intensive  margin 
simply  substitute  labor  and  instrument  outlays  for  rent 
outlays ;  there  is  no  occasion  for  inequality  of  costs,  or  for 
the  existence  of  marginal  costs  anywhere,  by  reason  of  the 
land  or  rent  fact  as  presented  in  this  view. 

Conceiving  all  supply-limiting  influences  as  costs,  it  is 
evident  that  any  reduction,  through  corn  culture,  from  the 
amount  of  land  to  be  had  for  wheat-raising,  must  neces- 
sarily express  itself  in  a  diminished  volume  of  wheat 
product,  in  higher  prices  for  wheat,  and  in  higher  rents 
for  wheat  lands.  But  inasmuch  as  this  leaves  such  wheat 
rents  as  are  actually  paid  to  function  as  cost  items  in  wheat 
production,  no  reason  yet  appears  for  counting  in  the 
possible — and  smaller — corn  rents. 

As  a  coUectivist  doctrine  the  land  cost  of  wheat  would 
be  found  in  the  displacement  of  corn;  so,  in  competitive 
production,  corn  cultivation  may  be  the  cultivator's  most 
attractive  alternative;  and,  if  the  case  were  one  of  indiffer- 
ence between  wheat  production,  corn  production,  and  non- 
production,  he  might,  with  equal  accuracy,  speak  of  his 
outlay  or  of  the  potential  corn  as  his  cost.  But  this  again 
is  to  call  either  the  wheat  rent  or  the  corn  possibility  of 
product  a  cost;  it  is  not  to  call  the  corn  rent  a  part  of  the 
wheat  cost. 

In  coUectivist  production  the  cranberry  patch  could  not 
afford  a  basis  of  cost — having,  by  assumption,  no  alterna- 
tive use.  But  in  competitive  production  other  competitors 
would  pay  the  cranberry  rent,  and  would  thereby  impose  it 
as  a  cost  upon  the  renting  tenant.  In  competitive  produc- 
tion, then,  the  presence  or  absence  of  alternative  adapta- 
tions does  not  decide  the  cost  problem.  Opportunity  cost 
for  the  individual  is  in  his  outlays  or  in  their  alterna- 
tive applications  and  is  not  necessarily  a  matter  of  the  alter- 
native applications  of  the  production  goods. ^^ 

"  There  is  no  force — and  for  present  purposes,  no  relevancy — in 
the  doctrine  that,  because  the  remission  of  rents  would  not  lower  price, 


292  VALUE  AND  DISTRIBUTION 

To  Mill's  dictum,  "When  land  capable  of  yielding  rent 
in  agriculture  is  applied  to  some  other  purpose,  the  rent 
which  it  would  have  yielded  is  an  element  in  the  cost  of 
production  of  the  commodity  which  it  is  employed  to 
produce,"  Jevons  objects: 

Here  Mill  edges  in  as  an  exceptional  case  that  which  proves 

to  be  the  rule If  land  which  has  been  getting  I2.  per  acre 

rent  as  pasture  be  ploughed  up  and  used  for  raising  wheat,  will  not 
the  £2  per  acre  be  debited  against  the  expense  of  the  production 
of  wheat? 

That  Jevons  has  assumed  a  case  of  production  by  a 
cultivating  owner  somewhat  obscures  the  reasoning.  But 
it  is  clear  that  if  this  owner  is  computing  his  cost  according 
to  an  alternative  product,  he  must  make  the  displaced 
pasture  product  the  cost  of  the  wheat,  and  not  the  rent; 
and  if  he  is  computing  his  cost  according  to  the  rent,  he 
will  find  the  cost  in  that  rent  which,  as  landlord,  he  could 
derive  from  the  land  by  renting  it  for  its  most  profitable 
use — the  wheat  use — and  not  according  to  some  smaller 
rent  quantity  possibly  obtainable  for  the  pasture  use;  thus, 
in  neither  case  can  the  pasture  rent  be  a  cost. 

Jevons,  however,  carried  his  doctrine  to  its  logical  con- 
clusion: "When  labor  is  turned  from  one  employment  to 
another,  the  wages  it  would  otherwise  have  yielded  must  be 
debited  to  the  expense  of  the  new  product."  There  is 
again  the  same  sort  of  confusion  of  thought,  but  this  time 
it  is  in  the  failure  to  distinguish  the  wages  of  work  from 
the  product  of  work.  But  as  applied  to  competitive  pro- 
duction, Jevons'  doctrine  amounts  to  saying  that  my  cost 
is  not  in  what  I  do  pay  my  men,  but  in  what  I  might  have 
paid  them,  had  I  paid  them  less." 

rent  is  no  part  of  cost.  This  would  equally  well  hold  to  exclude 
interest  or  wages  from  cost.  And  if  it  be  urged,  as,  for  example,  by 
Hyde,  that  there  is  a  marginal  subsistence  wage  which  must  be  paid 
in  order  that  the  laborer  live,  it  is,  perhaps,  fair  to  reply  that  the  land- 
lord may  equally  need  the  land  hire  in  order  to  live  ;  at  any  rate,  the 
cancellation  of  the  hire  would,  as  has  been  already  shown,  finally 
result  in  the  exhaustion  of  the  fertility  of  the  land. 

"•  It     should    be     noted    that     Seligman     in     his     lately     published 
Principles    of    Economics    adopts    in    its    most    unmitigated    form    the 


RENT  AND  COST  293 

Patton's  way  of  putting  the  case  is  perhaps  its  most 
forcible  expression :  "If  the  marginal  land  used  for  gar- 
dening will  yield  a  rent  for  wheat,  the  value  of  the  mar- 
ginal produce  of  garden  products  must  equal  the  cost  of 
the  labor  employed  plus  the  cost  of  the  land  when  used  for 
wheat." 

Surely  the  product  must  at  least  equal  in  value  the 
labor  wage  and  the  wheat  rent ;  but  it  must  more  than 
include  the  wheat  rent;  it  must  include  the  rent  for  the 
garden  use,  which  has,  by  assumption,  been  important 
enough  to  displace  the  wheat  use. 

But  there  is  nevertheless,  as  has  already  been  indi- 
cated, some  saving  grace  of  truth  in  this  alternative-rent- 
cost  doctrine ;  an  influence  important  for  the  price  of 
wheat,  and  an  influence  much  more  nearly  fundamental 
than  mere  entrepreneur  outlay,  is  vaguely  in  the  back- 
ground of  the  thought.  Still,  it  is  not  the  displaced  corn 
rent  that  makes  either  the  prices  of  wheat  or  the  rents  of 

reasoning  of  Jevons :  "In  the  cost  of  the  wheat,  therefore,  must  v  . 
always  be  included  the  rent  which  the  marginal,  or  no-wheat  rent,  /N 
land  would  earn  if  employed  for  the  next  lower  use"  (p.  zil^- 

And  Jevons  is  likewise  followed  in  his  confusion  of  rent  with 
displaced  product :  .  f 

"Furthermore,  not  only  must  the  marginal  rent  [the  displaced  prod- 
uct?] always  be  included  in  cost,  and  therefore  in  price,  but  in  a  higher 
sense  the  differential  rent  as  a  permanent  phenomenon  is  also  a  part  of 
price.  The  rent  of  anything  is  its  product.  [True  only  when  product 
is  used  in  another  connection  and  in  quite  a  different  sense,  as  dis- 
tributive value  share.]  The  greater  product  of  the  better  land  forms 
as  much  an  element  of  the  supply  as  the  smaller  product  of  the  poorer 
land,  and  price  depends  on  the  relation  of  the  total  supply  to  the  total 

demand Price    is    not    fixed    by    the    marginal    or    maximum 

cost  but  at  the  marginal  cost,  and  the  margin  depends  upon  the  out- 
put of  the  better  grades,  receding  as  this  increases,  advancing  as  it 
falls.  Every  bushel  of  wheat,  whether  it  comes  from  good  or  poor 
land,    affects   the    supply,    the   price,    and    the    margin." 

Now  note  the  argument :  The  rent  on  land  is  a  price-determining 
fact,  because  the  product  of  the  land  is  a  part  of  the  aggregate  com- 
modity supply.  But  the  objection  immediately  arises  that  in  this 
higher  sense — a  view  which  emphatically  deserves  far  more  extensive 
and  more  thorough  development  than  it  has  yet  anywhere  received — 
no  cost  of  any  sort,  but  only  product,  has  anything  to  do  with  price. 
And  in  last  analysis,  truly,  products  are  not  to  be  explained  by  remun- 
erations, but  by  supply  of  agents ;  the  supply  of  products,  being  deter- 


294  VALUE  AND  DISTRIBUTION 

wheat  land  higher,  nor  is  it  the  land  which  might  have 
been  used  for  corn  but  instead  was  used  for  wheat  that 
makes  wheat  prices  and  wheat  rents  higher — for  precisely 
the  contrary  is  the  fact — but  it  is  the  limitation  upon  the 
supply  of  wheat  lands  by  virtue,  among  other  causes,  of 
the  use  for  corn-growing,  that  makes  the  supply  of  wheat 
smaller,  thereby  the  prices  higher,  and  thereby  again  the 
wheat  rents  higher. 

And  once  more  be  it  repeated  that  rent  is  not  the  ulti- 
mate cause  of  price;  rent  in  any  line  of  production  is 
merely  the  entrepreneur  expression  of  the  limited  quan- 
tity of  agents  accessible  for  that  industry.  But  in  principle 
all  this  holds  equally  of  wages  and  of  interest  as  costs ; 
the  relative  scarcity  of  productive  agents  renders  the 
products  relatively  scarce,  thereby  the  prices  high,  thereby 
the  remunerations  for  the  agents  high.  The  high  remun- 
eration is  cost,  in  the  sense  of  a  supply-limiting  fact,  only 

mined  by  the  supply  of  agents,  determines  in  turn — on  the  cost  side 
— the  value  of  the  product ;  and  the  value  of  the  product  in  turn 
explains  the  remuneration  of  the  agent.  But  this  is  all  on  a  level 
underlying  the  shallow  entrepreneur-cost  analysis — the  merest  super- 
ficial adjustment  working  within,  and  controlled  by,  the  larger  situation 
facts — and  excludes  all  remunerations  from  the  category  of  causal 
factors ;  the  argument  is  thus  not  good  to  include  rent  equally  with 
wages  irx.  cost,  but  to  exclude,  together  with  the  entire  cost  computation, 
all  of  the  different  subheads  and  factors  of  cost  from  the  category 
of  value-determining  influences ;  under  this  analysis,  both  rent  and 
interest  appear  as  results  of  value,  as  mere  distributive  shares.  That 
is  to  say,  not  rent,  but  the  lands — their  scarcity ;  not  wages,  but  the 
supply  of  labor,  must  explain  the  limited  volume  of  product  and  the 
value  derivative  from  this  limitation.  And  so  bearing  in  mind  that 
wages  produce  nothing ;  that  land,  and  not  rent,  has  productive  power  ; 
that  land  is  one  thing,  and  the  rent  of  it  another  and  a  quite  dis- 
tinguishable thing,  we  are  in  position  to  appreciate  the  infinite  confusion 
of  fundamental  standpoints  and  of  derivative  analyses  involved  in  our 
author's  argument  as  it  continues  (the  italics  are  the  present  writer's)  : 
"The  rent  of  the  better  instrument  is  the  product  of  the  better  instru- 
ment. Each  unit  in  the  supply  is  a  part  of  the  total  product  or  total 
rent,  and  must  therefore  affect  the  price.  Hence  the  rent  or  product 
of  any  instrument  of  production,  whether  it  be  land  or  capital  or 
labor,  whether  it  be  marginal  or  differential  rent,  is  really  an  element 
in  the  price,  in  the  sense  that,  were  it  not  for  that  product,  the  price 
would  be  different.  Land  is  here  in  precisely  the  same  position  as 
other   things"    (p.   379)- 


RENT  AND  COST  295 

as,  under  entrepreneur  production,  it  is  the  result  and  the 
expression  of  a  relatively  limited  supply  of  agents. 

And  now  we  are  in  position  to  estimate  the  measure  of 
truth  contained  in  the  view  that,  the  market  value  of  agents 
being  fixed,  and  the  market  opportunities  and  burdens 
being  common  to  all  entrepreneurs,  and  the  entrepreneur's 
personal  equation  of  circumstances  and  ability  being  the 
selective  determinant  of  marginalship,  entrepreneur  differ- 
ences must  stand  as  the  only  variant  in  the  determination 
of  the  relative  costs. 

Such,  indeed,  would  be  the  truth,  were  all  industries 
alike  in  their  technological  aspects;  were  labor,  for 
example,  the  only  productive  agent,  or  were  all  industries 
equally  capital-using  and  land-using  and  labor-using  in 
their  methods  of  production.  Or  the  proposition  would 
hold,  if  it  were  possible  indefinitely, — as  in  large  degree  it 
is  possible,  and  as  at  the  margin  it  is  practically  always 
possible, — to  substitute  one  agent  for  another,  so  that  no 
relative  scarcity  of  any  kind  of  productive  agent  could  ever 
obtain. 

But  as  the  case  actually  stands,  peculiarities  of  adapta- 
tion in  productive  agents,  and  peculiarities  in  entrepreneur 
ability  and  adaptation  have  both  to  be  accepted  as  funda- 
mentally directive  situation  facts  for  the  supply  side  of  the 
value  equation. 


CHAPTER  XVII 

THE   MODERN   MOVEMENT 

marginal    utility    and   subjective   value 

(boehm-bawerk  and  von  wieser) 

In  English,  and  especially  in  economic  usage,  the  word 
value  connotes  relativity.  Seemingly,  this  does  not  hold,  in 
the  German  Sprach-Gcfilhl,  for  the  German  term  Wert. 
Hence,  translators  of  German  economic  literature  and 
expositors  of  German  economic  doctrine  have  to  choose 
between  rendering  the  one  German  word  Wert  into  the 
two  English  words,  zvorth  and  value,  as  occasion  may 
require;  as  against  attempting  to  make  the  one  word  value 
serve  as  the  English  equivalent  of  both  the  relational  and 
the  non-relational  senses  of  Wert. 

In  employing  the  two  terms  in  English,  there  is  the 
obvious  advantage — if  only  the  changes  and  shades  of 
meaning  in  the  German  are  correctly  distinguished  and 
reported — of  leaving  less  occasion  for  ambiguity  and  con- 
fusion in  the  English  readers'  attempt  to  follow  the  Ger- 
man thought.  On  the  other  hand,  there  is  equal  danger  of 
making  distinctions  where  there  were  none  in  the  thought 
of  the  German  author;  and  if  it  should  turn  out  to  be  true 
that  the  use,  in  the  German,  of  the  one  word  for  two 
unrelated  concepts  has  been  a  prolific  source,  not  merely 
of  misinterpretation  from  the  outside,  but  of  confusion  and 
inaccuracy  in  the  original  thought,  there  is  the  added 
danger  that  the  two  words  in  English  should  import  a 
clarity  which  is  not  in  the  original  discussions,  and  should 
make  gratuitously  difficult  the  task  of  understanding  how 
these   confusions   and   inaccuracies   have  been   occasioned. 

However,  there  is  nothing  for  it  but  to  make  the  best 
compromise  possible.  Wherever  in  the  following  discus- 
sions the  word  zvorth  is  used,  it  may  be  taken  as  clear  tliat 
the  use  of  U^ert  in  the  original  is  non-relational. 

Wert  in  the  subjective  sense  is  the  significance  which  a  good 
or  a   complex   of   goods   possesses    for   the  well-being  of   an   indi- 

296 


THE  MODERN  MOVEMENT  297 

vidual Objective  exchange  Wert  is  the  ability  to  com- 
mand in  exchange  a  quantity  of  other  economic  goods.^ 

Boehm-Bawerk  regards  this  objective  Wert  as  a  quality 
attached  to  the  good,  and  as  without  any  necessary  impH- 
cation  of  service  to  the  well-being  of  any  individual;  the 
concept  is  of  a  purely  objective  fact — the  power  of 
purchase — Kraft.  There  is,  in  fact,  said  to  be  no  possi- 
bility of  rendering  subjective  Wert  over  into  objective 
Wert;  though  the  first  may  be  used  to  explain  the  second, 
there  inust  be  a  distinct  theoretical  system  for  both.  But 
"that  two  so  distinct  subjects  must  be  handled  under  the 
one  name  of  Wert  is  unquestionably  a  source  of  great 
danger."  ^ 

A  good  may  stand  as  more  than  the  service  ful  cause — 
it  may  be  the  necessary  condition — of  human  well-being; 
herein  lies  the  distinction  between  utility  and  worth.  Worth 
implies  that 

with  the  possession  or  the  loss  of  the  good  a  satisfaction 
stands  or  falls When,  with  a  good,  an  item  of  satisfac- 
tion, well-being,  pleasure,  is  at  stake,  then  will  the  effective  interest 
we  take  in  our  own  well-being  be  transferred  to  the  good  which  we 
recognize  as  the  condition;  in  it  we  respect  and  prize  our  own 
welfare.^ 

Nor  is  the  notion  of  cost  a  necessary  element  in  the 
worth  concept;  worth  might  exist  with  goods  supplied  by 
the  bountry  of  nature,  if  only  the  supply  were  limited. 
Worth  implies  merely  "that  importance  which  a  good  or 
complex  of  goods,  as  the  recognized  condition  of  an  other- 
wise absent  utility,  acquires  for  the  well-being  of  an 
individual."  *  "The  measure  [das  Mass]  of  the  dependent 
service  is  everywhere  the  measure  [das  Mass]  of  the  worth 
of  the  good."  ^ 

^  Eugen  V.  Boehm-Bawerk,  "Grundzuge  der  Theorie  des  wirtschaft- 
lichen  Werts,"  p.  4.  (Conrads  Jahrbilcher,  1886,  neue  Folge,  XIII, 
pp.   1-82,  477-541). 

''Ibid.,  p.  7.  *  Ibid.,   p.    13. 

'  Ibid.,  p.  9.  "  Ibid.,  p.   20. 


298  VALUEIAND  DISTRIBUTION 

Notice  that,  despite  the  everywhere,  there  is  here  no 
thought  of  markets  and  of  exchange  ratios,  but  only  of 
the  service  to  the  individual ;  nor,  in  fact,  is  there  any 
implication  or  suggestion  of  the  quantum  of  one  dependent 
satisfaction  relative  to  some  other  satisfaction,  no  compari- 
son of  one  service  with  another,  or  of  one  necessary  condi- 
tion of  satisfaction  with  some  other  necessary  condition. 
The  thought  goes  solely  upon  absolute  magnitude  of  feel- 
ing; worth,  or  subjective  worth,  or  subjective  value,  in 
Austrian  usage — these  terms  are  really  interchangeable — 
is  the  significance  attached  to  the  means,  as  the  indefeasible 
condition  upon  which  the  feeling  magnitude  is  recognized 
to  be  dependent.  It  is  absolutely  essential  that  this  fact 
be  grasped  and  firmly  held;  the  Austrian  doctrine  is  either 
nonsense  or  hopeless  error  otherwise : 

I  say  advisedly  and  with  casuistic  caution,  the  entire  theory  of 
subjective  Wert  is  nothing  more  than  a  great  system  of  casuistry 
as  to  virhen,  under  vi'hat  conditions,  and  to  what  extent,  our  well- 
being  depends  upon  a  good." 

And  keeping  in  mind  that  the  subjective  worth  of  any 
good  is  measured  by  the  need  that  without  the  good  must 
go  unsatisfied,  it  follows  that  no  one  item  of  a  stock  of 
goods  can  have  a  greater  worth  than  that  measured  by  the 
weakest  desire  ministered  to  by  any  item  of  the  stock; 
so  one  item  of  a  non-important  class  of  goods  may  outrank 
another  item  in  the  most  important  class :  "Not  every  peak 
of  the  Alps  is  higher  than  any  peak  of  the  Pyrenees;"  all 
of  which  says  that  "the  worth  of  any  good  is  determined 
according  to  the  magnitude  of  its  marginal  utility" 
(Gre)ij:iint::en).'' 

It  follows  that  it  is  equally  as  false  to  measure  the 
worth  of  one  item  according  to  the  importance  of  its  class 
of  goods,  as  to  measure  the  importance  of  the  class 
according  to  the  importance  of  the  marginal  item;  the 
particular  item,  as  item,  or  the  group,  as  group,  must  get 
its  worth  according  to  the  utility  dependent  upon  it. 

Obviously  also  the  height  of  the  marginal  utility,  the 
subjective  worth  of  any  item  in  a  stock  of  goods,  must 

"  Boehni-Bawerk,  op.  cit.,  p.  20.  ^  Ibid.,  pp.   22,   29. 


THE  MODERN  MOVEMENT  299 

depend  in  part  upon  the  degree  of  the  individual  want,  in 
part  also  upon  the  size  of  the  stock  of  goods.  And  here 
follows  doctrine  invaluable   for   future  purposes : 

Since  the  relation  of  needs  and  provision  may  be  extremely 
different  with  different  individuals,  it  follovi^s  that  one  and  the 
same  good  may  have  many  different  degrees  of  subjective  worth 
for  different  persons,  a  fact,  in  the  absence  of  which  the  existence 
of  exchange  would  be  absolutely  unthinkable.  Thus,  in  otherwise 
similar  circumstances,  the  same  quantity  of  goods  has  for  poor  and 
rich  a  different  worth — lower  for  the  rich,  higher  for  the  poor.* 

Now  passing  over  for  the  moment,  as  does  Boehm- 
Bawerk  finally,  the  difficulty  of  making  utilities  for  differ- 
ent men  commensurable  or  even  comparable,  and  assuming 
this  difference  in  worth  for  the  rich  man  as  compared 
with  the  poor  man,  we  stop  to  note  that  each  of  these 
cases  of  worth  is  conceived  by  Boehm-Bawerk  as  a  quan- 
tity of  absolute  magnitude,  a  matter  in  each  case  of  the 
intensity  of  the  need  depending  for  its  satisfaction  upon 
the  good  in  question.  But  the  difficulty  remains  that 
solely  upon  the  basis  of  these  absolute  magnitudes,  no 
exchange  can  ever  be  worked  out;  if  otherwise,  there 
would  never  be  any  end  to  the  exchanging  between  rich  and 
poor.  That  they  exchange,  the  poor  man  a  horse,  and  the 
rich  man  a  cow,  gives  no  evidence  of  the  importance  to 
either  man  of  either  the  horse  or  the  cow,  and  indicates 
only  that  to  one  the  horse  is  more  important  than  the  cow, 
to  the  other,  the  cow  more  important  than  the  horse ;  that 
is  to  say,  an  exchange  can  take  place  only  because  the  two 
traders  differ  in  their  estimates  of  the  relative  importance 
— the  relative  marginal  utility — of  the  items  under  con- 
sideration, differences  not  of  subjective  worth — these  of 
themselves  would  be  irrelevant — but  dift'erences  in  relative 
subjective  worth. 

All  this  has,  of  course,  nothing  to  say  as  to  the  impor- 
tance or  the  accuracy  of  the  Austrian  concept  of  subjective 
worth,  but  refers  only  to  the  relation  of  this  concept  to  the 
phenomena  of  markets  and  of  market  values. 

Nor,  in  view  of  occasional  passages  in  Austrian  discus- 
sion, particularly  in  the  work  of  Boehm-Bawerk,  is  it  open 
to  doubt  that,  upon  occasion,  full  recognition  is  accorded  in 
Austrian  theory  to  this  obvious  fact  of  doctrine.     But  it  is 

^  Ibid.,  p.  41. 


300  VALUE  AND  DISTRIBUTION 

equally  clear  that  the  general  trend  of  the  discussion  and 
of  the  terminology  is  the  other  way ;  the  above-quoted  pas- 
sage is  one  out  of  numberless  instances  in  which  subjective 
worth  is  treated  as  relative,  without  explanation  or  apology 
and  by  mere  assumption,  or  is  out  of  hand  asserted  to  be 
identical  with  market  value — this  last  to  the  degree  that  the 
general  understanding  of  Austrian  theory  has  come  to  be 
that  it  explains  market  value  by  marginal  utility,  and 
resolves  market  value  into  marginal  utility. 

But  that  subjective  worth  is  alone  inadequate  to  explain 
exchanges,  that  by  each  trader  two  subjective  worths  must 
have  been  compared,  and  a  choice  between  them  made,  that 
is,  that  subjective  worths,  absolute  magnitudes,  must  be 
put  into  terms  of  relativity — must  undergo  the  valuation 
process,  before  on  either  side  a  readiness  for  exchange 
can  be  reached — is  entirely  clear.  No  one  is  ready  to  trade 
by  the  mere  fact  that  he  has  made  an  estimate  of  the 
importance  to  himself  of  some  one  particular  article — has  set 
a  worth  upon  that  article ;  he  must  have  done  a  similar 
thing  for  that  other  article,  the  quid  pro  quo,  else  there 
can  be  no  basis  for  finding  a  balance  of  gain  in  the 
transaction  of  exchange. 

But  now  recurring  to  the  basis — if  basis  there  be — for 
comparing,  in  terms  of  more  or  less,  utility  to  one  person 
with  utility  to  another  person,  it  must  be  admitted  that  the 
na'ive  common-sense  of  the  case  is  with  the  Austrian 
assumption.  It  does  appear  to  mean  something  when  a  boy 
asserts  that  a  blow  hurts  him  more  than  it  hurts  another 
boy,  or  when  it  is  said  that  music  gives  one  man  more 
pleasure  than  it  gives  another,  or  that  the  higher  orders  of 
life  feel  pain  more  intensely  than  do  the  lower.  Just  what 
or  how  much  this  naive  deliverance  may  signify  is  a  ques- 
tion rather  for  the  psychologist  than  for  the  economist ; 
but  that  there  can  be,  at  the  most,  only  a  vague  and  inac- 
curate comparability  and  commensurability,  is  apparent ; 
there  is  little  promise  here  of  scientific  service. ** 

The  truth  probably  is  that,  in   the  final   and  ultimate 

'  "Ah,  sir,  a  distinct  universe  walks  about  under  your  hat  and 
under  mine — all  things  in  nature  are  different  to  each — the  woman  we 
look  at  has  not  the  same  features,  the  dish  we  eat  has  not  the  same 
taste,  to  the  one  and  the  other  ;  you  and  I  are  but  a  pair  of  infinite 
isolations,  with  some  fellow-islands  a  little  more  or  less  near  us." — 
Thackeray,  Pendennis. 


THE  MODERN  MOVEMENT  3°! 

psychological  analysis,  the  more  or  less  in  these  cases  is 
itself  essentially  relative ;  to  say  that  a  thing  pains  me  more 
than  it  pains  you  is  true  only  with  the  reference  and  with 
the  limitation  of  my  larger  or  smaller  capacity,  my  powers 
of  endurance  and  of  self-control,  and  the  intensity  of  my 
coexisting  sensations,  perceptions,  and  emotions ;  that  is 
to  say,  the  comparison  of  my  pains  and  yours  is  a  matter 
solely  of  the  relative  importance  of  these  quantities,  each 
as  parts  of  two  distinct  sensational  and  emotional  situations 
and  systems;  that  my  more  is  more  only  in  the  sense  that  it 
is,  as  a  question  of  proportion,  a  larger  share  in  my  emo- 
tional system, — is  a  greater  quantity  as  matter  of  proportion, 
the  things  being  compared  only  in  this  aspect  of  ratios 
to  the  other  facts  in  their  respective  sensational  and 
emotional  environments. 

But  with  the  recognition  that,  as  applied  to  items  of 
demand  or  to  items  of  supply,  subjective  worth  is  an 
irrelevant  concept  until  carried  oyer  into  a  comparison  of 
two  subjective  worths — into  a  subjective  valuation — that 
is,  with  Austrian  theory  interpreted  at  its  best,  it  becomes 
true,  and  is  to  be  regarded  as  one  of  the  chief  merits  of  the 
Austrian  analysis  that  this  difificulty  as  to  the  comparability 
of  the  mental  states  of  different  men  disappears ;  the  ratios 
of  equality  or  of  inequality  can  be  compared,  entirely 
irrespective  of  the  quantities  constituting  the  ratios.^'' 

But  there  still  remains  the  problem  as  to  how  the  dif- 
ferent feelings  of  the  same  individual,  at  any  particular 
time  and  in  any  given  set  of  circumstances,  are  somehow 
reduced  to  a  common  denominator  and  made  commen- 
surable ;  and  here  the  discussion  of  Boehm-Bawerk  is,  in 
the  main,  admirably  convincing: 

Are  feelings  in  any  wise  rational  facts,  and,  even  if  so, 
are   they   susceptible   of   rational    measurement   and   com- 

^^  The  difficulty  disappears  for  value  theory,  in  the  restricted 
sense ;  but  it  is  not  so  clear  that  it  does  not  persist  for  the  theory  of 
interest.  For,  if  my  emotional  quantities  are  not  comparable  with 
yours,  how  comes  it  that  my  emotional  quantities  of  today  are  com- 
parable with  those  of  a  week  or  a  year  hence  ?  It  is,  perhaps,  enough 
that  each  individual  does  somehow  make  the  comparison,  in  a  manner 
satisfactory  to  himself,  and  that  with  what  justification  and  with  what 
measure  of  accuracy  or  of  error  need  not  concern  the  economic  inves- 
tigator. Perhaps  it  is  enough  that  different  situations  appeal  with 
different  degrees  of  strength  to  present  will  and  choice. 


302  VALUE  AND  DISTRIBUTION 

parison?  Can  whimsies  be  subjected  to  appraisal,  so  as  to 
stand  in  mathematical  relations  of  beauty,  agreeableness, 
or  sweetness, — this  person  or  thing  one  and  one-half  times 
as  beautiful  or  as  beloved  as  another,  etc.?  Well,  if,  at  least 
in  some  crude  but  effective  fashion,  they  were  not  so,  no 
economic  life  would  be  possible;  there  could  be  no  principle 
of  greatest  pleasure  with  least  pain;  if  we  were  unable  to 
posit  the  greater  here  and  the  less  there,  we  should  have 
no  way  of  deciding  which  desire  to  satisfy  or  to  provide 
against.  Somehow  we  do  the  thing.  The  pleasure  from  a 
cold  bath  is  sufficiently  unlike  that  from  a  symphony  con- 
cert, and  both  from  that  of  satisfying  hunger  or  thirst ;  but 
we  know  right  well  at  any  given  time  which  pleasure  is  the 
greatest  [which  opportunity  most  attracts  us].  Likewise 
the  toothache  is  a  dift'erent  sort  of  pain  from  a  pin  prick; 
but  we  are  able  to  decide  which  is  the  greater  matter. 
Somehow  we  arrive  at  a  decision  whether,  with  a  scant 
supply  of  water,  to  use  it  for  drinking  purposes,  or  for 
watering  the  crops.  That  we  have  an  economic  life  is  the 
proof  that  we  do  find  a  basis  of  commensurability,  or  at 
least  of  approximate  comparability.  We  do  decide  that  one 
pleasure  is,  in  a  general  way,  greater  than  another. 

But  after  all,  can  we  arrive  at  the  conclusion  that  one  is 
greatly  better,  or  moderately  better,  or,  again,  only  incon- 
siderably better  or  greater  than  another?  Can  we  get  at  it 
in  any  accurate  way,  even  to  mathematical  precision,  so 
that  pleasure  A  may  be  pronounced  to  be,  say,  three  times 
as  great  as  pleasure  Bf  We  certainly  do  it,  and  we  do 
certainly  express  ourselves  in  this  precise  way,  although 
the  quality  of  the  process  may  not  rationally  justify  the 
preciseness  in  the  statement  of  the  result.  How  otherwise 
should  we  trade?  A  boy  is  about  to  buy  some  fruit;  he 
may  have  for  his  money  one  apple  or  six  plums.  He  does 
in  fact  compare  the  pleasures ;  and  in  getting  at  a  decision, 
he  must  do  more  than  decide  that  he  likes  apples  better 
than  plums;  he  must  decide  whether  he  prefers  one  apple 
to  six  plums,  or  six  plums  to  one  apple.     Or  if  two  boys, 


THE  MODERN  MOVEMENT  303 

A  and  B,  are  trading  plums  for  apples,  shall  A  accept  the 
offer  of  three  plums  for  one  apple?  Take  it  that  he  refuses 
successive  offers  of  three,  four,  and  five,  but  accepts  the 
offer  of  six;  all  this  is  nothing  else  than  a  judgment  on 
his  part  that  the  pleasure  from  the  offered  good  is  or  is  not 
greater  than  the  pleasure  obtainable  from  the  quid  pro  quo 
to  be  rendered. 

And  it  is  plain  that  if  we  can  call  an  apple  worth  three 
plums,  we  can  call  a  plum  worth  one-third  of  an  apple. 
We  do  arrive  at  mathematical  statements,  precise,  definite 
ratios ;  and  so  it  is  perhaps  true,  as  von  Wieser  insists, 
that  all  of  these  relations  of  greater  and  of  less  worth 
finally  trace  back  to  relations  of  equality. 

But  we  remark  that  while  all  this  is,  in  the  main,  as 
convincing  as  it  is  clear  in  statement,  there  are  nevertheless 
some  implications  in  it  to  call  for  question.  The  dubious 
aspect  of  it  all  is  that  it  all  sounds  in  terms  of  pleasure  and 
pain,  the  comparison  of  pleasure  with  pleasure,  or  of  pain 
with  pain,  or  of  pleasure  against  pain.  It  is  true  that  this 
is  not  peculiar  to  the  Austrians, — to  the  utility  school,  so 
called,  in  economic  thought ;  it  is  characteristic  of  all  or  of 
nearly  all  of  economic  discussion  present  and  past.  But  it 
is  the  more  manifest  that  with  the  rapid  movement  in 
psychological  opinion  toward  what  is  termed  the  "volitional 
or  functional  psychology"  as  distinguished  from  the  pas- 
sive or  associationist  point  of  view — the  newer  insistence 
upon  impulse  and  instinct  in  human  activity  as  against 
calculating  and  reflective  choice — there  is  becoming  increas- 
ingly clear  the  necessity  for  reformulation  of  the  funda- 
mental assumptions  of  economic  theory.  The  process  of 
valuation  is  distinctly  a  psychological  phenomenon,  and  the 
problem  of  value  is  the  fundamental  problem  in  economic 
science.  It  may  not  be  too  much  to  say  that  the  next 
line  of  advance  in  economic  theory  will  be  distinctly  psy- 
chological in  character,  and  that  further  progress  awaits 
its  new  impulse  at  the  hands  of  the  psychologist. 

It  must  be  admitted  that  in  all  fields  of  investigation, 
other  than  jurisprudence  and  economics,  utilitarianism 
stands  as  a  point  of  view  discredited  and  outworn.  How- 
ever defensible  this  laggardness  may  be  for  a  science  where 


304  VALUE  AND  DISTRIBUTION 

the  question  is  merely,  as  in  jurisprudence,  on  what  reason- 
ings have  legal  precedents  and  legal  institutions  been 
worked  out,  there  can  be  in  utilitarianism  no  resting-place 
for  those  sciences  which,  like  economics,  ask  not  what 
opinion  the  doctors  of  the  science  have  held  concerning  the 
facts,  but  what  objectively  are  the  facts.  Economics  must 
keep  itself  abreast  of  modern  thought  or,  at  the  worst,  must 
more  or  less  belatedly  follow  after.  The  prehminary  step 
is,  then,  to  recognize  that  utilitarianism,  or  any  form  of 
hedonistic  theory,  is  a  thing  of  the  past. 

It  is  precisely  from  this  point  of  view  that  the  Austrian 
school  comes  seriously  under  suspicion.  Whether  it  be 
by  necessity  and  fundamentally,  or  merely  through  ter- 
minology and  gratuitously,  there  is  overmuch  flavor  in  it 
of  Benthamism,  too  much  talk  of  utility  in  the  sense  of 
pleasure,  and  too  much  analysis  of  market  activities  in  the 
aspect,  not  merely  of  egoistical  and  cool-headed  farsighted- 
ness, but  also  of  calculations  worked  out  under  a  com- 
mon denominator  of  utility  for  feeling — "pleasure  by  the 
shilling's  worth." 

This  is,  in  any  event,  if  not  bad  doctrine,  at  least  ques- 
tionable and  unnecessary  doctrine.  It  lacks  catholicity. 
There  are  too  many  thinkers  who  believe  that  men  sell  and 
buy  economic  goods  from  impulse  and  habit  and  irreflec- 
tion — that  instinct  and  appetite  and  spontaneity  manifest 
themselves  in  the  economic  world  as  truly  as  in  the  world 
of  play  or  romance.  There  are  those  going  even  so  far  as 
to  say  that  primarily  we  do  not  desire  things  because  they 
give  us  pleasure,  but  that  they  give  us  pleasure  because 
we  desire  them.  Just  as  the  chicken  pecks  its  way  out 
of  its  shell  without  foreknowledge  of  the  glories  of  the 
outside  day,  and,  immediately  upon  exit,  picks  up  a  grain 
or  two  of  sand,  nowise  interested  in  the  nearby  gratification 
from  its  pungent  flavor  or  in  the  far-away  joys  to  accrue 
from  a  well-sanded  digestion,  just  so  human  instincts  and 
tastes  and  impulses  reach  their  time,  and  spontaneous 
activities  press  forward  to  expression ;  rattles  wane  and 
dolls  wax,  while  in  later  succession  sleds  and  canes  and 
sweethearts  and  homes  and  olTspring  and  offices  and  pro- 
fessorships crowd  upon  the  stage  of  human  activity. 
Things  move  from  indifference  through  gratification  to 
satiation,  as  men  change  in  their  equipment  of  'desires  and 
tastes  and  sympathies ;  and,  when  a  thing  comes  to  give 


THE  MODERN  MOVEMENT  S^S 

us  pleasure,  it  does  so  merely  because  we  have  come  to 
like  it.  As  one  wakes  in  the  morning  according  to  the 
inner  time-lock  which  he  set  at  bed-going,  as  the  hypnotic 
patient  carries  out,  days  later,  the  mandate  given  during 
his  forgotten  trance  experience,  as  the  idee  fixe  of  patho- 
logical mental  conditions,  or  even  of  habit,  guards  one 
against  all  influence  of  argument  or  appeal,  as  the  resolve 
of  yesterday  remains  by  that  mere  fact  the  cherished  goal 
of  today,  so  do  all  of  us,  in  a  wide  domain  of  our  activities, 
move  in  a  half -blind  trance  of  inherited  impulses  and 
instincts  and  of  acquired  tendencies  and  aims.  So  much  of 
our  action  is  essentially  reflex  that  there  is  more  question 
whether  any  of  it  is  altogether  calculated  and  purposeful 
than  whether  all  of  it  is. 

Boehm-Bawerk  insists  that  we  could  not  choose  if  we 
could  not  measure  exactly.  Possibly  so ;  it  is,  however, 
important  for  the  economic  life  only  that  we  choose,  and 
it  is  neither  important  nor  clear  that  we  choose  or  compute 
or  compare  in  terms  of  the  pleasure  or  the  pain  equivalents 
of  the  goods.  It  may  be  that  the  desire  is  for  the  good — 
the  commodity,  the  fact — and  not  for  the  pleas-ure  of  which 
it  may  be  the  key.  Possibly  enough,  the  pleasure  is  a  sort 
of  by-product,  an  incident.  So  one  may  enjoy  the  process 
of  getting  rich  rather  than  the  wealth  when  acquired.  It  is 
often  more  important  for  happiness  to  have  a  goal  than  to 
reach  it.  Or,  doubtless,  the  desire  may  reach  out  solely 
toward  the  goal.^^ 

The  fisherman  who,  when  asked  whether  he  was  getting 
any  fish,  replied  that  he  was  not  fishing  for  fish,  but  for 
pleasure,  certainly  may  have  spoken  the  truth ;  doubtless 
some  of  our  activity  is  worked  out  under  the  pleasure 
calculus.  But  it  is  equally  certain  that  one  may  be  fishing 
for  fish,  and  not  for  pleasure ;  not  all  of  our  action  is  to  be 
reduced  to  a  pleasure-and-pain  "computation ;  there  is  a 
spontaneous  unfolding  of  activity — the  disposition  to  func- 
tion— the  type  of  action  insisted  upon  in  the  ethical  theory 
called  "energism."  Play  may  be  its  own  end  and  justifica- 
tion, not  the  pleasure  of  play ;  many  men  keep  up  the  habit 
of  living,  with  all  its  necessary  and  incidental  activities, 
without  attributing  pleasure  to  the  parts  separately  or  to 

"  A  student  reports  to  me  the  reply  of  a  petulant  and  inconsolable 
child :  "I  don't  want  nothing ;  I  just  want  to  want  something."  Later 
years  of  life  know  this  feeling  better. 


3o6  VALUE  AND  DISTRIBUTION 

the  aggregate,  and  even  under  the  conviction  that  life  is  a 
burden.  A  race  of  pessimists  might  not  suffer  in  numbers, 
as  compared  with  the  most  devoted  of  pleasure-seeking 
Epicureans.  We  seek  things  because  they  respond  to  our 
wants.  It  is  sufficient  that  the  fact  be  a  desired  fact,  an 
inducing  fact,  a  fact  operative  to  call  forth  a  response  of 
will  and  choice.  Who  knows  that  he  desires  a  thing  or  a 
situation  always  with  a  degree  of  intensity  proportioned  to 
the  pleasure  that  the  fact  when  attained  will  give,  or  is 
expected  to  give?  Is  the  martyr  seeking  the  pleasures  of 
martyrdom?  Now  and  then  does  not  one  smoke,  at  some 
blind  "I  must"  call  of  habit,  and  even  with  the  full  knowl- 
edge that  the  process  will  not  afford  pleasure,  and  that  the 
result  will  be  a  headache?  Are  the  desires  of  sex,  or  the 
parental  instincts  and  activities,  sheer  computations  of 
pleasure?  And  if  all  our  rational  activities  could  be  justi- 
fied under  this  hedonistic  calculus,  and  yet  if  this  be  not,  in 
fact,  the  computation  according  to  which  they  are  under- 
taken, and  if  many  of  our  activities  are  not  reasoned,  but 
are,  instead,  intuitive  or  habitual  and,  in  either  case,  uncal- 
culated,  it  must  follow  that  another  and  more  inclusive 
formula  than  that  of  the  hedonist  is  in  need  of  seeking.  It 
is  enough  that  we  choose  in  fine  gradations  and  with  clear 
distinctions,  and  it  does  not  matter  whether  the  measure  be 
accurate,  the  process  rational,  or  the  result  correct. 

That  most  of  our  activity  is  of  the  irreflective  tradi- 
tional sort  is,  indeed,  admitted  by  Boehm-Bawerk :  "Num- 
berless economic  acts  are  performed  purely  automatically 
or  mechanically ;"  ^-  and  all  choices  might  be  reached  in  as 
mechanical  a  way  as  some  are — and  as  perhaps  all  really  are 
— and  yet  the  economic  facts  would  remain  practically 
and  theoretically  much  as  now.  We  do  seem  to  ourselves 
to  do  some  considering ;  we  might  do  either  more  or  less 
and  still  the  fact  of  deciding  would  remain — choices  between 
goods  and  choices  between  alternative  activities  would  still 
take  place,  and  our  economic  theories  would  still  formulate 
themselves  very  much  as  they  are  now  formulated. 

I  must  simply  insist  with  all  emphasis  that  the  correctness  of 
our    measurements    does    not    signify,    but    only    that    we    make 

them Well  or  ill  the  reckoning  is  done  in  terms  of  com- 

mensurability." 

"  Boehm-Bawerk,   op.  cit.,  p.  49.  "  Ibid.,  p.  50. 


THE  MODERN  MOVEMENT  307 

So  it  does  not  much  matter  for  the  economic  aspects  of 
either  the  older  or  the  newer  thought  whether  one  concurs 
in  the  anti-utiHtarian  protest.  The  later  investigators,  like 
the  earlier,  appear  to  be  grievously  given  over  to  hedon- 
ism ;  but  so  have  other  men  been  to  Methodism  without 
obvious  disadvantage  to  their  economic  theories.  So  much 
is,  indeed,  asserted  by  both  Boehm-Bawerk  and  von  Wieser ; 
and  one  wonders  mostly  why,  if  all  this  hedonism  is,  in 
fact,  so  unessential,  one  finds  so  much  of  it.^*  And  yet  it 
may  safely  be  asserted  that  there  is  not  one  single  essential 

""Men  strive  after  happiness.  This  is,  perhaps,  the  most  general, 
and  certainly  the  most  vague,  expression  for  a  complex  of  strivings, 
all  of  which  have  for  the  object  the  bringing  about  of  such  occurrences 
and  conditions  as  we  know  and  feel  to  be  pleasant,  and  the  avoiding 
of  those  we  know  to  be  unpleasant.  Instead  of  'striving  after  happi- 
ness,' we  may  use  the  expression  'striving  after  self-preservation  and 
self-development,'  or  'striving  after  the  greatest  furtherance  of  life.' 
Or  we  may,  with  equal  propriety,  use  the  words  'striving  after  the 
most  complete  possible  satisfaction  of  wants  ;'  for  the  expressions  we 
are  so  familiar  with  in  economic  terminology,  'want'  and  'satisfaction 
of  want,'  mean,  in  the  last  resort,  nothing  else  than,  respectively,  the 
unsatisfied  craving  of  man  to  be  put  under  conditions  he  thinks  desir- 
able or  more  desirable  than  those  he  has,  and  the  successful  obtaining 
of  such  conditions." — Positive  Theory   of  Capital,  p.   9. 

"To  many  of  us  it  seems  a  positive  hindrance  to  the  fair  fame  of 
political  economy  now  that  its  professors  should  talk  of  a  'calculus 
of  pleasures  and  pains,'  as  if  that  were  the  foundation  on  which  all 
economical  theory  must  rest.  If  the  economist  is  no  longer  assumed 
to  suppose  that  all  men  act  only  from  self-interest  in  the  narrowest 
sense,  why  should  he  be  supposed  to  measure  only  pleasures  and 
pains  ?" — Bonar,    Philosophy    and    Political   Economy,    p.    236. 

"The  facts  are  simply  these  :  Every  species  of  wealth  is  of  value 
to  us  in  so  far  as  it  helps  us  to  supply  some  of  our  wants.  These  wants 
are  of  an  almost  endless  variety,  and  differ  very  greatly  in  the  degree 

of   their   importance If  any    of   these    wants    remain   entirely 

unsatisfied,  we  are  to  that  extent  the  losers  ;  and  their  loss  is  in  pro- 
portion to  the  importance  of  the  wants  whose  satisfaction  is  desired. 
But  each  of  our  wants  demands  only  a  limited  amount  of  the  material 
which  is  appropriate  to  its  gratification ;  and,  when  this  has  been 
granted,  it  demands  no  more.  Moreover,  each  want  can  in  general  be 
supplied  in  such  a  way  as  to  serve  its  purpose  moderately  well  with  a 
considerable  less  amount  of  material  than  that  which  would  bring  it  up 
to  the  limit  at  which  the  demand  would  absolutely  cease.  Hence,  as 
wealth  increases  in  a  particular  direction  the  increments  in 
that  direction  become  less  and  less  valuable  for  the  supply 
of  our  wants.  In  all  this  there  is  no  necessary  reference 
to  pleasure.  If  the  need  of  living  continued,  we  should  go  on  about  as 
before    without    any    connection    of   pleasure    with    the    gratification    of 

want We   have    seen    already   wherein   the   plausibility   of  the 

doctrine  consists.  Our  end  seems  plainly  to  be  in  the  realization  of 
something  which  our  nature  wants.     Such  a  realization  brings  pleasure. 


3o8 


VALUE  AND  DISTRIBUTION 


doctrine  in  the  system  that  might  not,  without  substantial 
impairment  or  change  of  economic  bearing,  be  stripped  of 
its   psychological   or   ethical   implications. 

For   the   purpose   of   the   present   discussion    there    is, 

Hence  it  is  very  natural  to  identify  pleasure  with  the  realization  of  an 
end." — Mackenzie,    Introduction    to   Social   Philosophy,   pp.    215,    216. 

The  interrelations  of  utilitarianism  with  the  associational  psy- 
chology, and  of  the  two  with  the  Laniarckian  biology,  and  of  the  three 
with  the  notion  of  thought  and  feeling  as  merely  material  atom- 
activities  taking  place  in  the  brain  conceived  as  seat  and  origin  of 
thought  rather  than  as  mere  organ,  are  all  suggestively  and  effectively 
set  forth  by  Professor  Fite  in  his  Introductory  Study  of  Ethics: 

"The  hedonistic  psychology  is  that  of  the  associational  school. 
According  to  this  school  the  mind  is  a  series  of  mental  states,  of 
g»a.y/-mental  pictures,  which  (o)  are  various  combinations  of  simple, 
homogeneous    mental    elements,    whose     form    of    combination    is     (fo) 

determined    by    the    order    of    external    stimuli The    original 

substance  of  mind  is  thus  wholly  amorphous  and  indeterminate,  like 
the  surface  of  a  blank  waxen  tablet,  and  mental  structure  is  the 
mechanical  result  of  the  impressions  left  by  external  objects 

"On  first  sight  human  impulses  show  an  enormous  variety ;  and 
prima  facie  any  impulse  would  appear  to  be  as  real  and  as  elementary 
as  any  other.  But  for  associational  psychology  there  is  no  way  of 
explaining  this  variety,  except  as  quantitative  variations  of  a  single 
elementary,  and  hence  real,  desire,  which  is  then  described  as  a  desire 

for    pleasure The    hedonist    finds    that    the    young    infant    has 

apparently  no  desires  except  the  sensuous  one,  and  from  this  he  con- 
cludes that  the  elementary  desire  is  the  desire  for  food  and  animal 
enjoyment.  But  according  to  the  evolutionary  conception,  the  develop- 
ment of  desire  does  not  begin  with  the  individual  infant,  nor  yet  with 
the  species ;  its  earliest  stages  must  be  sought  among  the  lower 
animals.  Turning  his  attention,  then,  still  further  backward,  the 
hedonist  finds  that  the  desires  of  the  lower  animals  are  still  more  dis- 
tinctly   sensuous.      Sensuous   desire   then   becomes   his   type   or   element 

of    desire The    child    ....    loves    his    mother    because    the 

thought  of  her  suggests  all  manner  of  comforts  of  which  she  is  the 
source;  originally  she  is  the  source  of  his  food 

"It  follows  that  the  hedonist  is  a  believer  in  determinism  as 
opposed  to  free  will 

"The  distinction  between  the  two  views  [Lamarckianism  and 
Weissmannism]  amounts  to  this:  according  to  one,  the  environment 
may  initiate  a  modification  (i.  e.,  create  an  instinct)  ;  according  to  the 
other,  it  can  merely  restrict  the  operation  of  instincts  already  inherent 
in  the  organism. 

"But  the  vital  point  of  the  controversy  lies  deeper.  It  has  to  do 
not  only  with  the  inheritance  of  acquired  characteristics,  but  with 
what  is  implied  as  to  the  mode  of  inheritance  of  all  characteristics. 
The  question  resolves  itself  ultimately  into  this:  which  is  primarily 
and  fundamentally  responsible  for  the  course  of  human  and  animal 
development,  the  environment  or  the  inherent  nature  of  the  organism  ? 
Now    the    Lamarckian    places    the    burden    of    responsibility    upon    the 


THE  MODERN  MOVEMENT  309 

therefore,  no  occasion  to  enter  into  a  criticism  of  the 
Austrian  terminology  purely  in  the  aspect  of  its  philo- 
sophical or  ethical  implications.  However  bad  the  psy- 
chology of  the  demand  school   in  economics  may  appear, 

environment.  In  other  words,  it  is  his  object  to  show  that  all  the 
characteristics  of  human  and  animal  life  are  due  entirely  to  environ- 
mental influences 

"From  the  hedonistic  standpoint  the  fundamental  characteristic 
of  human  nature  is  its  tendency  toward  passive  conformity.  There  are 
no  specific  impulses  to  satisfy,  no  specific  ends  to  be  accomplished ; 
our  only  object  is  to  make  ourselves  as  comfortable  as  possible  in  view 
of  the  existing  conditions  ;  and  provided  we  are  comfortable,  it  matters 
not  what  kind  of  a  life   we   lead 

"The  hedonistic  theory  inay  then  be  regarded  as  a  mechanical 
view  of  conduct.  The  ethical  theory  implies  immediately  a  mechanical 
psychology,  which  attributes  all  the  phenomena  of  conscious  life  to 
combinations  of  simple  mental  elements  ;  more  remotely  a  mechanical 
biology  which  translates  the  mental  elements  into  physiological 
elements  and  the  law  of  association  into  a  biological  law  ;  and  finally 
a  mechanical  cosmology  which  reduces  all  the  reality  of  the  world  to 
simple  physical  elements  governed  by  one  physical  law"  (chap,  vii, 
pp.  95-1 1 1,  passim). 

Thus  all  ethical  appraisals,  whether  of  approval  or  of  disapproval, 
come  to  be  interpreted  as  a  sort  of  brain-tissue  memory  established  by 
long  experience,  individual  or  racial,  into  lines  of  least  resistance  and 
intimate  association  between  brain  centers,  in  such  wise  that  the  facts 
or  activities  commonly  connected  in  experience  with  pleasure  or  pain 
are  regarded  with  approval  or  with  disapproval  as  the  representatives 
or  the  equivalents  of  the  respectively  associated  pleasures  or  pains. 

Among  many  possible  illustrations  of  the  prevailing  hedonism  of 
economic  thought,  the  following  are  offered  as  typical : 

Seager :  "The  normal  purpose  of  consumption  is  to  afford 
pleasure"  (op.  cit.,  p.  67).  "The  simi  of  the  efforts  and  sacrifices  that 
are    involved    in    production    constitute    what    is    known    in    economics 

as    the    cost    of    production Sacrifices,    ....   the    doing    of 

things  that  are  less  pleasurable  than  other  things  that  might  be  done 
but  free  from  any  element  of  pain"   (p.  53). 

Seligman :  "The  motive  that  guides  men  in  their  economic  life  is 
sometimes  described  as  the  economic  motive.  It  may  best  be  defined 
as  the  motive  that  compels  every  human  being  to  satisfy  his  wants  with 
the    smallest   possible    effort,    or   which    leads    him    to    secure    the   most 

pleasure   with   the  least   pain Human   beings   are    impelled   by 

other  motives  as  well In  searching  for  the  fundamental  laws 

of  economics  it  is  convenient  to  exclude  all  motives  save  the 
economic The  so-called  economic  man  is  a  complete  abstrac- 
tion. By  the  economic  man  is  meant  the  human  being  dominated 
by    the    economic    motive.       Such    a    man    does    not,     however,     really 

exist Side  by   side   with    the   economic   life   are   the   aesthetic 

life,   the   religious  life,   the  intellectual   life It  is,    indeed,   the 

function  of  economics  to  study  that  aspect  of  human  life  known  as  the 


3IO  VALUE  AND  DISTRIBUTION 

it  can  be  held  to  be  of  disadvantage  to  economic  thought 
only  in  the  sense  that  it  holds  the  field  against  some  better 
psychological    formulation   of   economic   foundations. 

There  is.  then,  no  sufficient  reason  for  quarreling  with 
the  term  utility  either  on  the  ground  of  its  distinctly 
hedonistic  associations  or  upon  the  basis  of  some  other 
word  better  serving  the  needs  of  the  case.  In  truth,  the 
better  word  is  not  readily  forthcoming;  and,  whatever  may 
have  been  the  consensus  of  use  in  past  economic  discussion, 
it    remains    true   that   iitilify   does    not   of    necessity   mean 

economic  life.  We  must  not,  however,  forget  that  we  are  studying 
man  in  only  one  aspect  of  his  existence"    (Principles,  pp.  4,   5). 

"Since  value  implies  capacity  to  satisfy  wants,  there  are  as  many 
kinds  of  value  as  there  are  classes  of  wants.  Things  have  a  scientific 
value,  an  aesthetic  value,  a  religious  value,  a  philosophic  value,  a 
political  value  and  so  on.  The  value  with  which  economics  has  to 
deal  is  economic  value,  a  small  subdivision  of  the  whole.  As  this  is  a 
treatise  on  economics,  we  shall  hereafter  use  the  term  value  in  the 
sense  of  economic  value,   that   is,   the  value   of  anything   for   economic 

purposes When  we  defined  economics   ....   as  the   science 

of  value,  it  must  be  remembered  that  what  is  meant  is  the  science 
not  of  all   value,  but  only  of  economic  value"   {Principles,   p.   174). 

Taken  altogether  this  appears  to  mean  that  the  economic  motive 
and  the  economic  field  include  all  activity  motived  by  pleasure  and 
pain  calculations ;  but  not  all  human  life  is  so  motived,  since  some 
wants  reach  toward  satisfactions  expressive  of  other  sorts  of  appeal. 
But  it  is  clear  that  economics  is  regarded  as  hedonistic  in  all  its  com- 
putations. Were  it  in  any  wise  relevant  to  the  matter  in  hand,  one 
might  stop  to  inquire  whether,  by  this  test,  a  picture  must  not  be 
excluded  from  economic  consideration,  pictures  being  aesthetic  facts ; 
and  how  is  it  possible  that  the  redness  of  an  apple  should  affect  its 
market  value?  The  services  and  the  boluses  of  the  physician  are  clearly 
enough  economic  items  ;  but  how  about  Christian  Science  healing,  and 
about  outlays  for  preaching,  and  for  other  ghostly  comfort  ? 

Pantaleoni :  "It  is  evident  that  commercial  or  industrial  activity 
or  the  activity  (whatever  its  nature  may  be)  displayed  by  men  in  the 
pursuit  of  what  is  commonly  termed  wealth  has  no  other  motive  than 
egoism"   {Pure  Economics,  p.   11). 

And  if  it  be  true  that  all  action  is  hedonistic,  is  it  so  in  the  sense 
of  the  seeking  of  pleasure  and  avoidance  of  pain,  or  is  the  calculation 
one  not  of  pleasure  and  pain  strictly,  but  only  of  pleasures  and  of 
pains?  And  how  does  the  individual  get  these  different  pleasures  and 
pains  into  any  common  denominator  so  as  to  become  comparable?  And 
is  it  safe  to  take  pleasure  or  pleasures  to  be  the  algebraic  negative 
of   pain   or   pains? 

To  some  of  these  fjucstions  the  safest  and  simplest  reply  is 
ignoramus;  and  with  regard  to  others  it  is  probably  true  that  for  the 
purposes  of  economics,  no  deeper  knowledge  is  called  for  than  such  as 
shall     safeguard    the     economist     from     unnecessary     pitfalls    or     from 


THE  MODERN  MOVEMENT  311 

"importance  for  happiness"  or  imply  any  sort  of  "pain 
or  pleasure  calculus."  Desirability  in  the  sense  of  the 
capacity  to  be  desired  is  inaccurate,  while  desirediiess  is  at 
least  awkward.  If,  however,  one  revolts  at  the  use  of 
utility  and  marginal  utility,  desire dness  and  marginal 
desiredness  may  perhaps  be  acceptable. 

Acquiescence  in  the  term  utility  carries  with  it  also  an 
acceptance  of  marginal  utility.  Entirely  aside  from  any 
question  as  to  the  dubious  purposes  to  which  this  second 
term  has  been  subjected  in  economic  discussion,  it  is  clear 
that  it  stands  for  an  actual  fact  in  individual  experience. 

unnecessary  choices  between  competing  presuppositions  or  competing 
schools  of  ethical  theory. 

Pantaleoni  {op.  cit.,  p,  26),  for  example,  discusses  the  question 
whether  pleasure  is  negative  pain,  or  whether,  on  the  contrary,  pleasure 
and  pain  are  qualitatively  distinct  sensations,  and  inclines,  on  the 
whole,  to  the  first,  the  positive-and-negative  view,  as  the  better 
explaining  the  experienced  actual  comparability  and  the  patently  actual 
commensurability  of  the  two. 

The  better  opinion  seems  to  the  present  writer  to  be  that  pain  and 
pleasure  are  multifarious,  pain  no  more  accurately  the  negative  of 
pleasure  than  is  one  pleasure  or  one  pain  the  negative  of  another 
pain  or  another  pleasure  ;  and  that  no  item  of  pleasure  is  comparable 
or  commensurable  with  any  other,  or  with  any  pain  item,  and  no  item 
of  pain  like  or  unlike  any  other  item  either  of  pleasure  or  of  pain, 
in  any  other  sense  than  that  all,  as  objective  facts  arousing  liking 
or  repugnance,  must  make  their  separate  and  respective  claims  upon 
the  will,  are  thus  brought  under  a  common  denominator  of  desire,  and 
are  commensurable  with  respect  to  the  strength  of  the  appeal  which 
they  make  to  choice, — the  relative  force  of  the  competing  desires  to  have 
or  to  avoid.  "It  is  a  simple  psychological  fact  that,  as  we  cannot  know 
ourselves  except  in  relation  to  objects  from  which  we  distinguish 
ourselves,  so  we  cannot  seek  our  own  pleasure  except  in  objects 
which  are  distinguishable  from  that  pleasure,  and  which  we  desire  for 
themselves.  Desire  always  in  the  first  instance  looks  outward  to  the 
object  and  only  indirectly  through  the  object  to  the  self;  pleasure 
comes  of  the  realization  of  desire,  but  the  desire  is  primarily  for  some- 
thing else  than  the  pleasure ;  and  though  it  may  gradually  become 
tinctured  by  the  consciousness  of  the  objective  result,  it  can  never 
entirely  lose  its  objective  reference.  The  pleasure  seeker  is  an 
abstraction  ;  for  just  in  proportion  as  we  approximate  to  the  state  of 
the  pure  hunter  for  pleasure,  for  whom  all  objective  interest  is  lost  in 
self-seeking,  it  is  demonstrable  by  the  nature  of  the  case,  and  shown 
by  experience,  that  for  us  all  pleasure  must  cease"  (Caird,  Hegel, 
p.  213). 

"We  can  only  have  the  highest  happiness — such  as  goes  along  with 
being  a  great  man — by  having  wide  thoughts,  and  much  feeling  for 
the  rest  of  the  world  as  well  as  ourselves  ;  and  this  sort  of  happiness 
often  brings  so  much  pain  with  it  that  we  can  only  tell  it  from  pain 
by  its  being  what  we  would  choose  before  everything  else,  because  our 
souls  see  it  is  good"  (George  Eliot,  Romola,  III,  290). 


312  VALUE  AND  DISTRIBUTION 

Its  best  illustration  is  found  in  the  falling  intensity  of  the 
desires  of  any  individual  for  any  given  sort  of  commodity 
at  any  given  point  of  time.  Successive  increments  of  sup- 
ply call  forth  a  continually  diminishing  response  of  desire. 
But  note  that,  if  the  case  be  not  conceived  as  one  of  a  suc- 
cession of  commodity  items — if  no  item  be  regarded  as 
coming  early  or  late  as  compared  with  any  other,  but  all 
as  portions  of  a  stock  already  in  hand — it  is  no  longer 
possible  to  regard  any  one  item  as  entitled  as  against  any 
other  to  the  marginal  place.  Any  item  may  stand  as  mar- 
ginal in  the  sense  that  the  loss  of  it  would  be  felt  as 
involving  only  the  utility  depending  upon  it,  which  utility 
would  be  equivalent  to  the  utility  of  the  last  item  in  the 
series,  were  the  different  items  acquired  or  considered 
successively. 

It  by  no  means  follows,  however,  that  each  of  the  items 
is  marginal  because  any  one  of  them  may  be  so.  Not  all 
of  the  items  of  a  stock  can  be  marginal  at  once.  The 
utility  loss  that  will  be  suffered  in  the  loss  of  the  entire 
stock  is  not  the  marginal  utility  times  the  number  of 
items,  but  the  utility  of  the  entire  stock  conceived  as  a 
marginal  stock.  No  one  item  can  be  regarded  as  marginal 
excepting  on  such  terms  of  regrouping  as  shall  impose  the 
non-marginal  quality  upon  all  the  others.^^ 

It  needs  also  to  be  clearly  held  in  mind  that  in  utility 
schedules  we  never  get  beyond  the  individual,  and  that 
marginal  utility  is  purely  a  matter  of  the  individual 
psychology.      For    different    individuals    there    can   be    no 

^*  Wieser  appears  to  be  of  the  other  opinion:  "The  majority  of 
theorists  ....  are  agreed  that  these  prices  are  fixed  by  a  marginal 
law.  We,  however,  have  gone  still  farther,  and  say  that  value  generally 
and  in  every  form,  even  that  of  use,  and  even  where  there  is  no 
exchange  ....  must  obey  a  marginal  law.  Jevons.  Gossen,  and 
Walras  have  not  gone  so  far  as  to  assert  this.  To  these  writers  the 
utility    of    the    separate    portions    or    items    of    one    supply    is    different 

according  to   the  amount  of  use  which   each  actually  gives I 

can  scarcely  hope  to  have  converted  him  [the  reader]  all  at  once  to 
such  an  unfamiliar  aspect  of  the  question"  (Natural  Value,  p.  26,  note.) 
But  in  another  note  upon  page  forty-four  Wieser  states  the  position  again 
in  a  way  to  raise  the  query  whether  he  is  not  talking  about  value  rather 
than  utility.  In  fact,  in  the  second  case  he  employs  the  word  value 
for  seemingly  precisely  the  same  meaning  as  was  in  the  former  case 
expressed  by  utility,  the  two  statements  together  being  perhaps  mostly 
serviceable  as  illustrating  the  confusion  of  utility  with  value  character- 
istic of  Austrian  discussion. 


THE  MODERN  MOVEMENT  31 3 

comparison  of  utilities  either  qualitatively  or  quantita- 
tively. As  including  more  than  one  individual  schedule, 
there  is,  therefore,  no  possibility  of  a  marginal  service  in 
the  sense  of  the  smallest  service  of  a  descending  series; 
there  is  no  series.  That  A  will  pay  30  and  B  29  in  no 
sense  implies  that  the  utility  to  B  is  to  the  utility  to  A 
as  29  :  30.  One  may  be  willing  to  give  today  for  bread 
double  what  he  would  have  given  a  year  ago,  though  only 
equally  as  hungry  today.  The  strength  of  his  desire  for 
other  things  is  a  necessary  factor.  Cases  are,  as  we  have 
seen,  marginal,  not  in  terms  of  absolute  utility,  but  only  of 
relative  utility.  A  wealth  of  illustrations  edifying  to  the 
point  of  weariness  about  the  cigar  and  the  loaf.  Dives  and 
Lazarus,  the  starving  man  and  the  man  at  feast,  ought 
long  since  to  have  placed  this  truth  beyond  either  the 
right  or  the  danger  of  serious  discussion,  but  have  not 
done  so.  We  still  hear  that  stocks  of  goods  in  the 
general  market  may  be  ranged  under  one  schedule  with 
one  margin  of  utility,  and  that  the  margin  of  utility  both 
determines  and  is  the  market  value  for  all  the  items  of 
the  market  stock. 

Thus,  considered  merely  as  the  marginal  item  in  an 
individual  schedule,  marginal  utility  becomes  no  more 
than  vaguely  quantitative — the  assertion  of  a  smaller 
utility  than  any  other  in  the  series.  In  no  degree  is  it  a 
measure  of  the  absolute  utility  or  of  the  precise  ratio  in 
utility  which  any  item  in  the  series  bears  to  any  other.  To 
say  that  a  certain  utility  is  the  smallest  of  a  series  does  not 
imply  anything  about  the  size  of  this  utility.  The  smallest 
potato  in  the  bin  may  be  a  very  sizable  potato. 

From  the  very  fact  also  that  the  series  is  a  series,  and 
that  the  very  law  of  satiation  which  it  expresses  requires 
that  the  items  of  the  series  be  unequal  in  utility  volume, 
there  can  be  no  term  within  the  series  capable  of  serving 
accurately  as  the  utility  measure  of  any  other. 

Nor  is  it  more  defensible  to  assert  that  the  measure  of 
the  utility  is  to  be  found  in  money.  To  say  that  the  limit 
price  upon  a  horse  for  a  would-be  buyer  is  30  means 
simply  that  at  any  price  above  30  the  bidder  would  prefer 
to  reserve  his  purchasing  power  for  other  purposes.  But 
it  will  not  do  to  assert  with  the  Austrians  that  this  30 
measures  the  utility  of  either  the  goods  or  the  horse. 
There   is   no   such   thing  as   measuring  utility   in   money. 


314  VALUE  AND  DISTRIBUTION 

All  that  the  price  limit  of  30  says  is  that,  as  between  the 
utilities  of  two  things  purchasable  at  30,  to  go  as  far  as 
30  for  the  horse  is  to  reach  the  point  of  indifference.  At 
higher  than  30  something  else  is  preferable.  This  30 
mark  speaks  as  to  the  relative  utility — to  the  particular 
individual — of  horses  and  other  things,  but  says  nothing 
as  to  the  absolute  utility  of  the  things  compared.  That 
John  is  taller  than  Tom  tells  nothing  of  how  tall  either  is. 
Likewise,  to  assert  an  equality  of  utility  between  two 
things  tells  nothing  as  to  the  absolute  utility  of  either. 
That  all  the  potatoes  in  a  bin  are  of  equal  size  leaves 
everything  in  the  dark  as  to  the  size  of  any  of  them. 

It  follows  that  the  vague  term  utility  gets  quit  of  only 
one  dimension  of  its  vagueness  in  becoming  marginal. 
Nor  does  the  strictly  marginal  utility — the  lowest  utility 
of  the  series — do  even  this.  It  is  only  when  a  quantitative 
relation  of  utility  is  asserted  with  reference  to  a  commodity 
outside  the  series — when  utility  becomes  relative — that 
marginal  utility,  so  called,  can  express  itself  in  price  limits 
or  become  relevant  to  the  phenomena  of  exchange.^^ 

^°  The  general  relation  of  utility  to  wealth  and  to  value  may  now, 
perhaps,  be  mostly  taken  for  granted. 

Senior  defines  wealth  as  "all  those  things,  and  those  things  only, 
which  are  transferable,  are  limited  in  supply,  and  are  directly  or  indi- 
rectly productive  of  pleasure  or  preventive  of  pain."  Note  the  three 
requisites:  (i)  transferability,  (2)  limitation  in  supply,  (3)  advan- 
tage in  terms  of  pleasure  or  of  prevention  of  pain. 

Enough  has  been,  for  present  purposes,  said  of  the  pain-and- 
pleasure  implications  of  utility.  As  to  transferability  it  is  to  be 
objected  that  while  it  is  evidently  an  essential  condition  to  market 
exchangeability  and  thereby  an  important  influence  upon  the  utility  of 
any  good  to  its  possessor,  a  thing  may  yet  be  useful  without  being 
transferable,  and,  if  other  conditions  coexist,  may  have  value  to  the 
individual.  Jevons  (Principles  of  Economics,  Macmillan,  1905,  p.  3) 
puts  the  case  thus:  "Transferableness  ....  is  ....  in  most 
cases  a  question  of  degree.     There  are  comparatively  few  things  which, 

though  useful  to  one  person,  are  absolutely  useless  to  another 

An  old  family  portrait  may  be  more  interesting  and  useful  to  the 
family  than  to  other  people  ;  but  if  its  painter  is  of  repute  and  skill, 
it  may,  nevertheless,  be  valued  by  other  owners,  A  rare  edition  may 
be  almost  priceless  for  the  book-collector  who  wants  it  to  complete  his 
series,  but   it  may  be   desired   by    other   collectors   with    less   warmth." 

This  is,  truly,  an  accurate  paraphrase  of  Senior  (op.  cit.,  pp.  8-10) 
who  is  cited  by  Jevons  with  approval.  But  clearly  enough,  the  talk 
here  is  not  of  transferability  in  any  ordinary  sense ;  the  difficulty  is 
not — so  far  as,  in  degree,  there  is  any  difficulty — that  the  usefulness 
cannot  be  assigned,  but  that  there  is  none  to  be  assigned  ;  buyers  could 
have,  if,  in  their  view,  there  were  anything  to  be  had.  To  others 
than    the   possessor,    the    thing    in    question    lacks   utility ;    they    do    not 


THE  MODERN  MOVEMENT  315 

The  concept  of  marginal  utility  is,  beyond  question,  of 
great  significance  in  economic  analysis,  though  as  we  have 
seen,  and  shall  repeatedly  have  occasion  to  note,  it  is  often 
most  disastrously  confused  with  marginal  purchaser's  price, 
that  is,  with  relatiz'c  viargiiial  utility, — relative  subjective 
worth,  subjective  value. 

But  evidently  it  is  only  the  latter  concept  that  has  any 
part  or  share  in  the  term  value  as  a  market  category  and 
expression  of  purchasing  power.  Value  in  this  relational 
sense  emerges  only  when  utilities,  as  an  individual  cate- 
gory, have  been,  by  different  individuals,  conceived  rela- 
tively to  other  utilities  to  be  displaced.  For  different 
buyers  the  relative  utilities  of  horses  to  other  goods,  when 
expressed  in  terms  of  m.oney  as  30,  28,  26,  etc.,  are  purely 
personal  estimates  as  to  the  utility  of  horses  compared  with 
the  utility  of  the  things  which  each  buyer  must  forego  in 
the  event  that  he  purchases  a  horse ;  and  these  are  marginal 
estimates,  since  each  expresses  the  purchasing  disposition 
pushed  to  the  point  of  indifference.  Each  of  these  money 
statements  is,  therefore,  an  expression  of  subjective  value — 

desire.  But  the  next  point  made  by  Jevons,  still  following  Senior,  is 
valid :  "The  question,  of  course,  is  not  one  of  mere  physical  trans- 
ferability. There  are  some  things,  such  as  land,  which  cannot  be 
handed  about,  but  can  only  be  transferred  in  legal  possession.  Other 
things,  for  instance,  a  beautiful  voice,  cannot  be  received  or  parted 
with."  • 

And  just  as  transferability  is  a  condition  neither  to  utility,  nor  to 
value  in  the  individual  schedule  and  in  the  relative  sense,  but  is  an 
essential  only  to  exchangeability,  so  Senior's  second  requirement, 
limitation  in  supply,  is  accurately  a  condition  not  to  the  existence  of 
utility  but  only  of  utility  in  the  marginal  items,  or  more  accurately,  to 
utility  in  all  of  the  items  of  the  stock ;  and  as  condition  to  marginal 
utility,  and  thereby  to  subjective  worth,  and  thereby  to  the  comparison 
of  worths,   it  is  finally  a   condition  to  the  existence  of  market  value. 

There  is,  however,  in  the  books,  much  confusion  of  utility  with 
marginal  utility;  of  this  the  following  cases — entirely  outside  the 
Austrian   sponsorship — may  be   cited   as   typical   examples : 

"At  a  given  moment  there  is  a  given  number  of  units  and  there 
is  but  one  marginal  utility,  and  this  is  the  same  for  each  of  the  units. 
It  is  quite  erroneous  to  say  that  where  there  are  30  units,  the  utility  of 
the  tenth  is  36  :  of  the  twentieth  25  :  of  the  thirteenth  19,  It  is  equally 
incorrect  to  say  that  when  there  are  60  units,  the  'total  utility'  is 
equal  to  the  area  between  the  right  angle  and — etc,"  "while  the  value 
is  equal  to  the  rectangle,  etc." — Fetter,  Principles,  p.    25. 

From  Seligman,  Principles,  p.  176:  "At  any  given  time  the  utility 
of  each  apple  is  equal  to  that  of  the  last,  and  therefore  to  that  of  any 
of  them," 

And  Seligman,  carrying  out  the  implications  of  this  position,  adds : 


3i6  VALUE  AND  DISTRIBUTION 

not  subjective  worth,  but  subjective  value,  a  relational  fact 
— money  serving  as  mere  equation  sign  between  subjective 
worths  of  unknown  size :  x=y,  with  no  notion  as  to  the 
magnitude  of  either  x  or  r.  Mere  marginal  utility — sub- 
jective zi'orth,  for  most  purposes  (but  see  later?) — ex- 
presses the  utility  that  is  lost  in  the  loss  of  one  item  of 
stock.  In  relative  marginal  utility,  loss  in  terms  of  some- 
thing else,  the  thought  is  carried  over  into  the  field  of 
value. 

We  are  now  ready  for  further  additions  to  our  equip- 
ment of  terms.  Market  value  is  the  objective  resultant — 
the  equilibrium  point — of  all  the  different  subjective  values 
implicated  in  the  market.  The  marginal  traders  are  those 
with   whose    sul^jective   valuations    the   market   adjustment 

"The  marginal  utility  of  the  stock  ....  is  always  equal  to  the 
marginal  utility  of  the  final  unit  multiplied  by  the  number  of  units  ;"or 
as  Fetter  puts  the  same  view :  "The  dependence  felt  by  men  on  the 
group  is  the  product  of  the  units  by  the  marginal^utility"    (p.   25). 

It  is  of  course  to  be  objected  that  the  service  derived  from  the 
whole  group  of  units,  considered  as  an  indivisible  aggregate,  or  the 
loss  which  would  be  sustained  by  the  loss  of  the  entire  group  is  some- 
thing indefinitely  greater — possibly  infinitely  greater — than  the  product 
of  the  marginal  utility  multiplied  by  the  number  of  units.  It  is  true 
that,  taken  separately,  no  one  item  can  have  greater  importance  attached 
to  it  than  has  the  marginal  item,  since,  when  the  items  are  considered 
separately,  substitution  is  possible  ;  but  all  the  items  have  not  the  same 
utility.  If  it  were  really  true  that  the  utility  of  each  item  of  a  stock 
falls  to  the  level  of  the  last  item,  and  if  it  were  true  that  the  total 
utility  of  the  group  is  the  product  of  the  marginal  utility  multiplied  by 
the  number  of  items,  there  could  never  be  any  utility  in  any  single 
item  or  in  any  group  of  items,  so  long  as  the  supply  were  sufficient 
to  allow  any  part  of  it  to  be  free  goods.  That  is  to  say,  the  view 
presented  by  Professor  Seligman  permits  the  emergence  of  utility  only 
as  the  result  of  scarcity  ;  and  yet  scarcity  alone  is  not  sufficient  for 
value — else  mosquitoes  would  be  valuable  in  winter.  What  name 
shall  serve  to  denote  the  other  essential  ? 

In  a  general  way,  the  notion  of  utility  is  doubtless  fairly  clearly 
held  in  economic  thought ;  and  not  much  needs  here  be  said  in  this 
connection.     Jevon's  statement  of  the  case  is  in  the  main  admirable : 

"Most  persons  confuse  the  utility  with  the  physical  (lualities  which 
are  merely  the  basis  or  requisite  condition  of  the  utility.  The  utility 
of  gold,  for  instance,  cannot  be  said  to  consist  in  its  beautiful  yellow 
color,  its  ductility,  freedom  from  corrosion,  and  high  specific  gravity. 
If  these  qualities  constituted  utility,  then  gold  would  be  useful  even  to 
the  drowning  traveler  whose  pockets  are  loaded  with  coin.  The 
water  of  the  river  in  which  he  drowns  would,  moreover,  be  useful, 
because  its  qualities  remain  the  same  as  if  it  served  the  population  of 
a  town  for  drinking  and  washing  purposes.     As  Senior  briefly  remarks: 


THE  MODERN  MOVEMENT  31? 

most  nearly  coincides.  For  all  traders  other  than  the  mar- 
ginal there  is  an  appreciable  advantage  accruing  from  the 
fact  of  exchange.  These  differentials — these  distances  of 
advantage  between  the  sacrifice  which  would  have  been 
consented  to,  if  imposed,  and  the  sacrifice  actually  consented 
to — are  the  traders'  quasi-rents. 

It  is  not  intended — it  would,  indeed,  be  most  unfair,  to 
imply  that  everywhere  in  Austrian  discussion  this  aspect  of 
relativity  fails  of  adequate  recognition,  or  that  it  does  not 
occasionally  receive  expression  at  the  hands  of  Boehm- 
Bawerk.  One  wishes  merely  that  this  recognition  had  been 
consistent  and  firmly  adhered  to,  especially  in  such  authori- 
tative treatises  as  have  been  translated  into  English.     But, 

'Utility  denotes  no  intrinsic  quality  in  the  things  which  we  call  useful ; 
it  merely  expresses  their  relations  to  the  pains  and  pleasures  of 
mankind.'  " 

Aside  from  the  distinctly  hedonistic  tone  of  this  formulation,  one 
could  improve  it  only  by  extending  its  scope  ;  for  it  seems  to  be  the 
truth  that  no  quality  or  attribute — utility  or  other — is  really  intrinsic  ; 
just  as,  psychologically  considered,  sound  is  not  an  aerial  vibration  drum- 
beating  upon  the  organs  of  auditory  sensation — but  the  subjective 
effect  or  interpretation  of  the  external  phenomenon  ;  and  just  as  heat 
and  light  and  color  are  psychological  significances  derived  from  what 
— supposedly — are  objectively  mere  etherial  waves — so  all  the  so-called 
qualities  are  such  only  as  reported  to  the  mind  through  a  reporting 
mechanism,  and  as  modified  and  conditioned  by  the  nature  and  limita- 
tions of  this  mechanism,  and  as  interpreted  according  to  the  activities 
and  capacities  of  the  recipient-percipient  mind.  The  ultimate  truth  is, 
then,  that,  like  utility,  all  these  qualities  are  such  only  in  the  sense  of 
relations  between  the  objective  fact  and  the  human  consciousness ; 
there  is  no  place  for  "intrinsic"  qualities  anywhere,  unless  as  expres- 
sive of  the  faith  that  there  is  somewhere  a  reality  in  itself  lying  behind 
and  upholding  the  reality  as  it  appeals  to  us. 

But  in  view  of  all  this,  and  of  the  further  truth  that  all  thought 
must  run  in  terms  of  relation,  what  does  it  mean  to  speak  of  an 
absolute  magnitude  of  feeling?  There  can  surely  be  intended  no  denial 
that  in  expressing  or  estimating  or  appraising  the  feeling,  it  must  be 
thought  of  as  an  experience,  and  must  be  understood  and  appreciated  in. 
the  light  of  other  experiences  ;  nor  is  it  denied  that,  for  any  purposes 
of  thought  or  of  action,  the  feeling  must  be  considered  with  reference 
to  its  setting  of  experiences,  and  in  relation  to  experience  past  and 
experience  to  come.  But  by  the  very  necessity  of  this  relativity  in 
the  nature  of  thought,  it  is  all  the  while  implied  that  different  some- 
things in  sensation  or  feeling  exist  to  be  related.  Before  things  can 
be  understood,  compared,  related,  thought  of,  they  must  first  be.  Thus 
before  a  feeling  can  be  decided  to  be  greater  or  less  than  another, 
more  or  less  desirable,  similar  or  different,  it  must  have  been  experienced 


3i8  VALUE  AND  DISTRIBUTION 

with  the  accepted  terminology  of  the  school,  neither  con- 
sistency of  doctrine  nor  clarity  of  exposition  was  readily 
possible.  But  more  of  this  later.  Our  present  interest  is  in 
the  working-out  by  Boehm-Bawerk  of  the  relation  between 
subjective  IVcrt  and  market  value. 

Price  in  German  usage  indicates  merely  the  quid  pro  quo 
of  exchange.  When  the  exchanged  good  is  money,  it  is 
accurately  to  be  called  the  money  price.  Careful  attention 
to  this  fact  is  essential,  if  misinterpretation  is  to  be  avoided 
by  English  readers. 

Fundamental  to  exchange  are,  according  to  Boehm- 
Bawerk,  three  assumptions  :  ( i )  There  can  be  no  exchange 
except  where  exchange  brings  advantage;  (2)  the  larger  is 

separately,  and  in  this  sense,  absolutely ;  it  can  be  a  term  in  a  relation 
only  on  condition  of  having  a  separateness,  an  existence  outside  the 
relation.  One's  first  experience  of  any  sort  must  contain  its  own 
quantum  of  discomfort  or  of  satisfaction ;  it  does  not  need  that  one 
have  stepped  on  my  toe  twice,  in  order  that  I  come  to  have  a  first  feel- 
ing experience.  If  pain  or  pleasure  could  exist  only  with  a  second 
experience,  neither  could  ever  exist  at  all. 

True,  one  could  not  appreciate  the  experience  as  like  or  different 
in  relation  to  another,  unless  upon  the  assumption  of  preceding 
experiences  with  which  to  put  the  current  experience  into  relation, 
but  he  could  nevertheless  have  the  current  experience  and,  feeling- 
wise,  approve  or  disapprove  of  it.  It  is  in  this  sense  that  we  may 
speak  of  an  absolute  magnitude  of  feeling. 

Nor  is  there  question  that  in  the  process  of  putting  these  feeling 
magnitudes  into  relation,  in  deciding  between  them,  making  compari- 
sons of  them,  some  development  or  modification  may  take  place  in  the 
terms  or  in  the  completeness  of  the  separate  appraisals.  It  is  rare  that 
one  knows  precisely  how  much  he  would  pay  for  a  thing  more  than  he 
actually  does  pay ;  he  has  never  carried  the  processes  of  appraisal, 
comparison,  and  computation  farther  than  to  know  that  the  com- 
modity in  question  signifies  to  him  more  than  the  quid  pro  quo  to  be 
foregone.  But  more  and  more  as  the  needs  of  action  require,  and  in 
the  process  of  deciding  to  act,  or  in  the  process  of  acting,  these 
separate  and  absolute  magnitudes  of  feeling  acquire  clearer  definition, 
both  relatively  and  absolutely  ;  and  it  is  probable  that  in  the  process  of 
comparison,  the  act  of  thinking  things  into  relation,  there  may  be  some 
reaction  of  one  term  in  the  relation  upon  the  other,  to  modify  the 
appraisal  of  each,  not  merely  in  point  of  precision,  of  definition,  but 
also  (jualitatively.  But  not  the  less  must  there  be  two  separate 
feeling  magnitudes  to  be  compared,  between  which  a  relation  is  to  be 
established  and  a  choice  declared.  These  absolute  magnitudes,  these 
to-be-related  significances,  are  of  the  general  nature,  the  raw  material, 
of  subjective  worth. 


THE  MODERN  MOVEMENT  3^9 

preferred  to  the  smaller  advantage;  (3)  the  smaller  is  pre- 
ferred against  no  advantage. 

Exchange  therefore  presupposes  that  for  each  trader 
the  obtained  good  affords  a  greater  utility  than  the  good 
foregone,  so  that,  "since  the  significance  of  goods  for  well- 
being  expresses  itself  as  subjective  value  (worth),  the 
obtained  good  possesses  a  greater  subjective  worth  than  the 
released  good."  ^^ 

It  follows  that  "an  exchange  is  economically  possible 
between  persons  only  who  appraise  commodity  and  price 

good  differently — in   fact,   in  reverse  order One 

must  appraise  the  good  higher,  the  other  lower  than  the 
price  good."  ^^ 

Now,  is  it  true  that  the  good  parted  with  and  the  good 
received  must  have  the  same  value — Wert — since  they 
exchange  against  each  other?  In  the  subjective  sense,  in  the 
purely  personal  appraisal  of  the  traders,  no ;  for  each  man 
the  worths  compared  must  be  unequal  to  the  degree  at  least 
to  tip  the  scales  of  choice.^'* 

Here,  it  is  to  be  remarked,  is  surely  adequate  recognition 
of  the  necessity  of  getting  two  subjective  worths  into  com- 
parison, into  a  subjective- worth  ratio,  that  is  to  say,  into  a 
subjective  valuation,  before  either  a  price  offer  or  a  refusal 
price  can  be  reached,  and  any  subjective  value  come  to  exist 
in  that  relational  sense  affording  a  possible  key  to  market 
value ;  but  in  all  the  Austrian  prodigality  of  terminology 
there  is  no  term  for  this  valuation  relation  between  subjec- 
tive worths.  And  note  that  for  any  trader,  even  that  one 
nearest  the  margin,  some  quasi-rent  is  asserted ;  market 
price  can  never  quite  express  any  marginal  demand ;  as  a 
ratio,  market  value  is  never  quite  coincident  with  the  mar- 
ginal purchaser's  ratio  between  marginal  utilities.  Marginal 
buyers  and  sellers  are  those  who,  at  the  market  adjust- 
ment, approach  nearest  to  indifference, — whose  utility-ratios 
between  goods  obtained  and  goods  foregone  are  nearest  to 
being  expressed  by  the  i  :  i  ratio:  "That  bidder  is  the 
strongest  [taiischfdhigste]  who  appraises  his  own  good 
lowest  relatively  to  the  good  offered,  or,  what  amounts  to 

"  Boehm-Bawerk,  op.  cit.,  p.  480.     ^^  Ibid.,  p,  490.       ^°  Ibid.,  p.  490. 


320  VALUE  AND  DISTRIBUTION 

the  same  thing,  appraises  the  offered  good  highest  rela- 
tively to  his  own."  ^*^ 

And  here  follows  the  familiar  illustrative  scheme — with 
the  horses — for  the  working-out  of  the  price  adjustment,  a 
method  too  familiar  to  require  attention  for  present  pur- 
poses; but  it  is  nevertheless  worth  remembering  that  it  is 
all  worked  out  in  terms  of  money  against  goods. -^ 
From  this  analysis  several  principles  are  deduced: 
Which  of  the  bidders  succeed  in  trading?  The  five 
buyers  who  appraise  the  horses  highest,  and  the  five  sellers 
who  appraise  the  horses  lowest. 

But  here  again  the  relativity  is  forgotten;  the  appraisal 
cannot  be  in  terms  of  mere  subjective  worth,  else  no 
exchange  could  be  deduced  as  possible.  The  lowest  and 
the  highest  should  have  been  expressed  as  relative  to  the 
medium  of  exchange,  or  as  relative  to  the  price  commodity 
on  the  other  side.  Simply  as  an  expression  of  marginal 
utility,  nothing  is  to  be  arrived  at. 

The  height  of  the  market  price  is  limited  and  fixed  by  the 
height  of  the  subjective  worth  estimates  of  the  two  marginal 
pairs.'" 

The  unfirm  grasp  of  the  relativity  principle  is  at  this 
point  suggested  by  the  vague  and  halting  quality  of  the 
statement;  worth  appraisals  or  worth  estimates  (subjective 
Wertschatzungen)  can  rightly  mean  not  mere  recogni- 
tions of  subjective  worth,  but  valuations  of  subjective 
worths,  comparisons  made  between  subjective  worths. 

And  it  is  further  to  be  objected,  (i)  that  the  formula- 
tion misconceives  the  relation  of  the  marginal  traders  to  the 
other  traders  and  to  the  process  of  price  adjustment;  the 
marginal  buyer  or  seller  shows  merely  the  degree  or  extent 
in  which  he,  or  any  other  trader,  has  individually  affected 
the  market  outcome;  (2)  not  the  two  marginal  pairs,  but 
one  marginal  pair,  not  four  persons  but  two,  give  the 
breadth  of  the  margin  interval  within  which  the  price  is 
indeterminate  and  left  to  higgling  for  its  adjustment.  A 
point  may  easily  be  fixed  between  two  points ;  but  precisely 
how  a  point  shall  be  fixed  between  four  points  is  not  readily 
clear. 

-•  Boehm-Bawerk,  op,  cit.,  p.  491. 

^  Ibid.,   pp.   493-96.  "Ibid.,  p.  501. 


THE  MODERN  MOVEMENT  321 

All  of  this  process  and  the  outcome  of  it  trace  back, 
Boehm-Bawerk  asserts,  to  subjective  value  (Wert)  as  the 
ultimate  explanation : 

The  relation  between  commodity  and  price  good  is  it  [which 
distinctly  is  not  subjective  worth,  but  a  relation  between  subjective 
worths]  that  decides  the  individual  to  take  steps  looking  to  an 
exchange,  decides  as  to  the  degree  of  the  exchange  disposition, 
decides  sharply  up  to  what  point  the  interests  of  each  bidder  will 
lead  him  to  compete,  and  likewise  the  limit  at  which,  as  outbidden 
and  excluded  bidder,  he  must  retire  from  the  competition;  decides 
in  its  further  effect  who,  in  the  scale  of  strongest  bidders,  will  suc- 
ceed in  trading,  to  whom  the  role  of  marginal  pair  [note  the 
singular]  will  fall,  and  thereby  also  the  height  of  the  price  at 
which  the  exchange  shall  take  place.^^ 

Subjective  worth  does,  in  fact,  none  of  these  things; 
and  even  the  subjective  valuations  do  not  do  the  last.  But 
forthwith  the  exposition  relapses  into  accuracy : 

We  can  with  entire  precision  describe  the  price  as  the  result  of 
subjective  worth  appraisals  of  commodity  and  price  good,  as  these 
appraisals   meet   each   other   upon  the  market.^ 

Nothing  having  yet  been  said  as  to  the  relation  of 
demand  and  supply,  we  have  now  to  inquire  "from  what 
circumstances  it  is  decided  whether  the  worth-appraisal 
level  [Schdtsungsniveau]  of  the  marginal  pairs  is  high  or 
low."  25 

There  are  four  forces  or  facts  making  for  the  deter- 
mination of  the  price:  (i)  the  nature  of  the  demands 
directed  upon  the  commodity ;  (2)  the  height  of  the  appraisal 
figures  (Schdtsungssiffern)  on  the  part  of  the  buyers ; 
(3)  the  number  of  wares  for  sale;  (4)  the  height  of  the 
appraisal  figures  on  the  part  of  the  sellers : 

But  ....  our  appraisal  figures  are  not  simple  magnitudes. 
They  are  in  no  sense  simple  data  as  to  the  absolute  magnitude  of 
the  subjective  Wert  which  the  commodity  has  for  the  appraisers, 
but  rather  they  are  relative  quantities  derived  from  the  comparison 
of  two  separate  l^^r^-appraisals,  the  appraisals  of  commodity  and 
of  price  good.  In  saying  that  A  appraises  a  horse  at  200  florins, 
we  have  said  and  implied  nothing  as  to  what  absolute  importance 

^  Ibid.,  p.  503.  ^*' Ibid.,  p.  503.  ^  Ibid.,  p.  509. 


322  VALUE  AND  DISTRIBUTION 

the  possession  of  a  horse  has  for  A  but,  on  the  contrary,  we  have 
merely  expressed  the  relation  in  which  the  Wert  of  the  horse 
stands  for  A  in  relation  to  the   Wert  of  the  money-price.^° 

It  must  be  admitted  that  this  is  accurate,  adequate,  and 
admirable ;  and  if  the  terminology  were  adapted  to  the 
doctrine,  and  the  doctrine  adhered  to  without  vacillation, 
and  were  the  exposition  consistent  and  free  of  confusion 
both  of  thought  and  of  terms,  nothing  better  could  be 
asked  for,,  so  far  as  this  aspect  of  value  doctrine  is  con- 
cerned. But  it  is  equally  true  that  so  stated  and  inter- 
preted, no  Ricardian  would  ever  put  the  doctrine  in  issue, 
excepting  possibly  as  to  the  importance  of  the  conclusions 
and  the  justification  of  the  attendant  much  talking.  The 
Ricardian  is,  as  we  have  seen,  overdisposed  to  assume  that 
the  demand  can  be  taken  for  granted,  without  analysis  and 
without  saying. 

But  Boehm-Bawerk  also,  under  force  (3),  "the  number 
of  wares  for  sale,"  recognizes  that  cost  influences  await 
investigation. 

COST    OF     PRODUCTION 

In  truth,  the  Austrian  analysis  of  subjective  worth  has 
not  yet  been  fully  presented.  Bearing  in  mind  that  "a  good 
which  one  already  has  he  appraises  according  to  the  loss 
(Einbusse)  which  he  would  suffer  by  the  loss  of  it,"  ^'^  a 
principle  of  substitution  has  to  be  recognized.  The  loss  of 
any  particular  good,  say  of  an  overcoat,  is  not  commonly  to 
be  measured  according  to  the  utility  of  the  overcoat,  but 
according  to  the  utility  of  the  good  which  will  have  to  be 
foregone  in  order  to  replace  the  overcoat.-'' 

It  is  by  virtue  of  this  doctrine  of  substitution  that  goods 
of  highest  necessity,  food,  clothing,  and  the  like,  command 
so  limited  an  appreciation  in  point  of  worth.  But  obviously 
the  principle  does  not  apply  when  the  loss,  if  shunted  off, 
would  fall  upon  something  not  less  but  more  important; 
when,  in  short,  the  lost  good  is  itself  marginal.  Substitu- 
tion through  reproduction  really   falls  under  this  general 

^  Boehm-Bawerk,    op.   cit.,   p.    509. 

'"Ibid.,  p.  33,  note.  ^^ Ibid.,  p.  36. 


THE  MODERN  MOVEMENT  323 

principle  of  substitution,  and  furnishes  the  theoretical  basis 
for  the  bearing  of  costs  upon  subjective  Wert.  The  loss  is 
always  that  smaller  loss  into  which  the  loss  in  question  may 
be  translated.-" 

There  is  no  objection  fairly  to  be  made  here; 
the  valuation  process  is  unquestionably  of  the  sort  stated. 
But  it  is  none  the  less  in  point  to  note  the  necessary  impli- 
cation that,  whatever  may  be  the  truth  as  to  market  value, 
subjective  value  (IVert)  is  hereby  made  a  question  not  of 
marginal  utility  but  of  marginal  cost,  marginal  displace- 
ment. Subjective  JVerf  is  then  badly  presented  when,  as 
over  and  again  in  Austrian  discussion,  it  is  made  exclu- 
sively a  question  of  marginal  utility.  When,  for  an  over- 
coat, for  which,  by  virtue  of  its  utility,  one  would  pay  if 
necessary  $20,  one  actually  pays  only  $10,  he  is  justified  in 
placing  the  value  of  the  coat  at  $10;  but  not  the  utility;  the 
utility  is  still  the  twenty-dollar  quantity,  and  the  purchaser's 
differential,  the  utility  gain,  the  quasi-rent,  is  thus  $10, 
simply  because  the  coat  had  and  retains  a  marginal  utility 
of  $20.  And  thus  the  strange  outcome  of  all  this  discussion 
appears  to  be  that  marginal  utility,  or,  more  accurately, 
subjective  value,  as  value  determinant  presented  as  unre- 
lated to  cost  and  as  fundamental  to  cost,  is  itself  finally 
resolved  into  cost.  But  however  this  may  be,  it  is  clear 
that,  in  accurate  analysis,  marginal  utility  should  remain 
one  thing,  and  the  marginal  cost  of  the  marginal  utility, — its 
subjective  value,  its  worth, — should  remain  another  and  a 
quite  distinct  thing.  On  any  other  terms  all  is  confusion, 
all  utility  becoming  marginal  in  a  general  mish-mash  of 
costs.  For  if  marginal  utility  and  cost  value  are  one,  there 
can  be  no  utilities  that  are  not  marginal;  all  the  similar 
items  of  a  stock  must  be  of  equal  marginal  utility,  equal 
subjective  value,  and  equal  market  value;  therewith  disap- 
pears all  possibility  of  the  explanation  of  value  by  margins. 

And  so  when  Wieser  says  that,  "in  Paradise  nothing 
would  have  IVcrt  but  satisfactions,"  it  is  immediately  to  be 
added  that  satisfactions  also  would  not;  they  would  have 
utility  and  relative  utility,  but  no  marginal  utility  and  no 
value,  either  of  the  subjective  or  of  the  objective  sort, 
simply  "because  there  one  could  have  anything."  ^^ 

'^  Ibid.,  p.  39. 

^  Friedrich  von  Wieser,  Natural  Value,  edited  by  William  Smart, 
translated  by  Christian  A.  Malloch,  Macmillan,   1893,  p.  20. 


324  VALUE  AND  DISTRIBUTION 

But  the  Austrian  doctrine  of  costs  will  best  be  con- 
sidered in  another  connection.  The  task  now  at  hand  is 
to  present  the  concept  of  subjective  Wert  with  such  ade- 
quacy and  definiteness  as  the  nature  of  the  concept  permits. 
To  this  end  extended  reference  will  be  necessary  to  the 
Positive  The  or  y.^'^ 

At  all  events,  it  seems  from  the  analysis  so  far  as  at 
present  carried,  that  even  in  marginal  utility,  strictly  inter- 
preted, there  is  nothing  but  utility,  and  this  without  any 
pretense  of  a  measure  for  the  utility  set  up,  unless  it  be  in 
the  utility  of  some  non-marginal  item ;  and  all  we  can  then 
say  is  that  it  is  the  less  useful  of  the  two. 

Recalling  that  Say  stood  distinctly  for  the  measure  of 
utility  by  value,  rather  than  of  value  by  utility,  one  would 
like  to  know  whether  anything  is  made  in  Austrian  theory 
of  this  distinction.  According  to  Boehm-Bawerk,  "The 
measure  of  the  utility  which  depends  on  a  good  is,  actually 
and  everywhere,  the  measure  of  value  for  that  good."  ^- 

And  again: 

The  value  of  a  good  is  measured  [Die  Grosse  des  Wertes 
eines  Gutes  bemisst  sich]  by  the  importance  of  that  concrete  want 
or  partial  want  which  is  least  urgent  among  the  wants  that  are  met 
from  the  available  stock  of  similar  goods.  What  determines  the 
value  of  a  good  [ist  fiir  seinen  Wert  massgebend]  then,  is  not  its 
greatest  utility,  not  its  average  utility,  but   the  least  utility,  .... 

the    economic    marginal    utility    of    the    good The    value 

[Wert]    of  a  good  is   determined  by  the   amount   of   its   margmal 
utility  [nach  der  Grosse  seines  Grenznutzens] .''' 

Merely  stopping  to  note  that  the  meaning  of  value  is 
here  again  referred  to  marginal  utility  as  distinguished 
from  the  cost  or  displacement  attendant  upon  marginal 
utility,  we  ask  ourselves  what  is  meant  by  saying  that 
value  "is  determined"  by  the  amount  of  the  marginal  utility, 

•'"  Eugen  V.  Boehm-Bawerk,  The  Positive  Theory  of  Capital,  trans- 
lated, with  a  preface  and  analysis,  by  William  Smart,  Macmillan,   1891. 

-'^ Ibid.,  p.  139.  In  the  original  the  passage  reads:  "Das  Mass  des 
abhangigen  Nutzens  ist  wirklich  und  iiberall  auch  das  Mass  fiir  den 
Gutenwert." — "Capital  und  Capitalzins,  zweite  Abtheilung,"  Positjz'e 
Theorie  des  Capitals,  Buch  III,  Abschnitt  III, 

''Ubid.,  p.  148. 


THE  MODERN  MOVEMENT  325 

more  than  merely  that  value  is  marginal  utility?  But  that 
there  is  a  difference  is  to  be  inferred  from  the  earlier  state- 
ment that  the  measure  of  the  marginal  utility,  the  trans- 
formation of  it  into  subjective  worth,  is  to  be  traced  to  the 
purely  psychological  and  subjective  feeling-state  attendant 
upon  the  existence  of  the  want  situation  of  the  individual 
relative  to  the  good ;  all  of  which  must  mean  that  the  psy- 
chological emphasis,  the  significance  for  feeling,  constitutes 
the  subjective  valuation,  the  non-relative  worth  appraisal 
of  the  marginal  utility,  its  expression. 

So  far  the  doctrine  is  parallel  with  that  of  Say,  except- 
ing that,  with  Say,  the  talk  was  purely  and  solely  of  market 
value,  and  that,  with  subjective  value,  IVert,  the  notion  is 
rather  one  of  the  expression  of  value  than  of  the  measuring 
of  value.  Subjective  value,  as  such,  implies  no  measure,  is 
not  expressed  in  equivalents,  and  stands  for  an  absolute 
magnitude  of  feeling.^* 

In  Boehm-Bawerk's  treatment  of  substitutionary  utili- 
ties, in  the  Positive  Theory,  he  returns  to  the  overcoat  illus- 

**  It  is  also  to  be  said  that  here,  as  elsewhere  in  Austrian  discus- 
sion, there  is  difficulty  in  being  certain  of  one's  justification  in  inter- 
polating the  word  subjective  or  any  sign  that  subjective  worth  is 
intended, — to  be  sure  that,  after  all,  the  statement  in  hand  is  not 
intended  to  apply  as  well,  or  even  exclusively,  to  market  value.  That 
this  discussion  is  found  in  the  chapter  on  "Subjective  Value"  does  not 
guarantee  that  the  thought  may  not  drift  into  market-value  waters. 
Thus  on  page  152,  after  discussing  the  subjective  value  of  a  sack  of 
corn  out  of  a  farmer's  stock  of  similar  sacks,  and  after  attaching  this 
value  to  the  marginal  utility  of  the  final  sack,— clearly  an  absolute 
magnitude, — Boehm-Bawerk  proceeds  :  "Transfer  now  the  field  of  illus- 
tration   from    the    solitary    in    the    primeval    forest    to    the    bustle    of    a 

highly    organized    community The    more    goods    there    are    of 

one  kind  in  the  market  the  smaller   ....    is  the  value The 

more  individual  goods  there  are  available  in  any  class,  the  smaller  is 
the   marginal    utility   which    determines    the    value." 

That  there  can  be  no  such  thing  as  a  market  marginal  utility,  but 
only  a  market  marginal  purchase  price,  does  not  need  repeating,  unless, 
indeed,  the  assumption  is  tacitly  made  that  all  purchasers  are  precisely 
alike  in  point  of  subjective  situation  and  of  purchasing  power.  But 
this  is  merely  another  case  of  the  confusion,  chronic  in  Austrian 
discussion,  of  marginal  utility  with  market  value  and  of  subjective 
value  with  objective  value.  If  the  Austrians  cannot  keep  their 
categories  separate,  it  is  idle  to  expect  others  to  do  so.  And  so  Hob- 
son,  doing  yeoman  service  against  the  straw-man  doctrine  that 
marginal  utility  determines  or  is  market  value,  appears  to  achieve  an 
easy  victory  over  Boehm-Bawerk  by  merely  quoting  from  page  159  of 
the  Positive  Theory :  "The  fewer  and  the  less  urgent  the  wants  and 
the  more  goods  there  are  to   satisfy  them,   the  deeper  down   the  scale 


326  VALUE  AND  DISTRIBUTION 

tration :  "I  shall  try  to  shift  the  incidence  of  the  loss  onto 
other  lines  of  goods,"  sell  some  of  them,  or  drawing  upon 
my  stock  of  cash,  go  without  something  that  I  had  intended 
to  buy,  or  I  shall  economize  in  household  expenses,  and 
only  in  case  of  extreme  need  go  without  an  overcoat. 
"Only  in  the  last  case  is  the  JVcrt  of  the  overcoat  deter- 
mined by  the  immediate  marginal  utility  of  its  own  class. 
In  most  cases  it  is  determined  by  a  substitutionary  utility."  ''* 
But  again  it  is  to  be  objected  that  this  getting  to  the 
margin  by  the  method  of  substitution  is  not  to  find  the 
utility  of  the  final  item  of  the  stock  in  question,  or  the 
utility  of  the  single  item  under  consideration,  but  only  the 
cost  of  it,  and  thereby  the  subjective  significance,  the  worth 
of  it.  And  in  either  case,  whether 'away  from  the  margin 
or  upon  it,  the  worth  as  matter  of  subjective  estimation 
obtains  no  expression  in  terms  of  something  else,  that  is  to 
say,  receives  no  measurement,  but  is  merely  a  statement  of 
the  absolute  magnitude  of  significance  to  the  individual 
well-being,  and  therefore  is  a  relative  quantity  only  in  the 
sense  and  to  the  extent  that  it  has  a  place  higher  or  lower 
in  the  personal  list  of  absolute  feeling  magnitudes. 

Wieser  is  as  obtrusively  hedonistic  in  his  point  of  view 
as  is  Boehm-Bawerk  or  as  were  any  of  the  classical  school ; 
but  the  validity  of  his  doctrine  is  not  made  to  stand  or  fall 
thereby : 

What  is  it  that  gives  value  to  the  satisfaction  itself  w^e  shall 
not  attempt  to  explain.     It  v^^ill  be  enough   if  we  give  the   symp- 

goes  the  satisfaction  and  the  lower  falls  the  marginal  utility  and  the 
value.  It  comes  nearly  to  the  same  thing,  only  in  a  less  precise  form, 
to  say :  Usefulness  and  scarcity  are  the  ultimate  determinants  of  the 
value  of  goods." 

Upon  which  Hobson  remarks  (Economics  of  Distribution,  p.  106)  : 
"Now,  not  only  is  scarcity  thus  fetched  up  from  the  supply  side  of  the 
equation  as  a  determinant  of  value  separate  from  utility,  but  it  is 
made  the  determinant  of  marginal  utility  itself,  for  'it  is  the  scarcity 
that  decides  to  what  point  the  marginal  utility  actually  does  rise  in  the 
concrete  case'  "  {Positive  Theory,  p.  160).  And  Hobson  is  pardonable 
for  not  seeing  that  Boehm-Bawerk  is  talking  here  about  the  individual 
schedule  and  the  purely  personal  bearings  of  wants  and  provision  for 
wants,  that  is,  that  the  discussion  is  not  in  the  market-value  field  but 
only  in  the  subjective  field. 

'"Boehm-Bawerk,  op.  cit.,  p.  156. 


THE  MODERN  MOVEMENT  327 

toms  by  which  the  degrees  of  value  or  importance  are  recognized. 
It  is  the  intensity  with  which  the  satisfaction  is  desired;"* 

which  sufficiently  cuts  loose  from  all  hedonistic  complica- 
tions. 

Not  free  goods  but  only  economic  goods  can  have  value ; 
and  so  Menger's  definition  is  approved  by  Wieser :  Value  is 
"the  importance  which  concrete  goods,  or  quantities  of 
goods,  receive  for  us  from  the  fact  that  we  are  conscious 
of  being  dependent  on  our  disposal  over  them  for  the 
satisfaction  of  our  wants."  ^'^ 

But  as  Wieser  elsewhere  remarks,  "Menger  has  a  com- 
plete system  of  subjective  value  but  makes  no  attempt  to 
develop  objective  value."  ^^  This,  therefore,  is  not  to  be 
understood  as  a  definition  of  market  value. 

This  definition,  however,  as  adopted  by  Wieser,  is  found 
near  to  the  beginning  of  his  treatise,  before  any  discussion 
of  subjective  value  {Wert)  has-been  attempted,  and  is 
formulated  as  a  general  definition  of  value.  And  so  upon 
page  twenty-four,  as  the  title  of  chapter  ix,  we  read, 
"The  Valuation  of  Goods  in  Stocks.  The  Law  of  Marginal 
Utility  the  General  Law  of  Value."  And  the  chapter  itself 
discusses  collectivist  valuation,  in  which,  evidently,  there  is 
no  such  thing  possible  as  marginal  utility  in  any  accurate 
sense. ^" 

^^  Natural   Value,  p.   7.  '^^  Ibid.,  p.  21.  ^^  Ibid.,  p.  54. 

^^  These  confusions  must,  in  the  interests  of  space,  be  rather 
instanced  than  fully  reported  or  adequately  discussed. 

Confusions  of  utility  with  marginal  utility ;  and  with  price : 

"In  a  word,  the  value  of  a  supply  of  similar  goods  is  equal  to  the 
sum  of  the  items  multiplied  by  the  marginal  utility." 

Now  while  this  would  perhaps  be  true,  were  the  question  one  of 
market  value,  it  is  distinctly  untrue,  as  a  question  either  of  aggre- 
gate utility  or  of  aggregate  subjective  worth,  that  is,  the  subjective 
worth  of  the  group  conceived  as  a  whole,  a  unit ;  but,  still  within  the 
collectivist  computation,  the  discussion  proceeds :  "A  harvest  consist- 
ing of  1,000,000  quarters,  is  short  ....  so  ...  .  that  grain 
dare  not  be  consumed  unless  the  act  of  consumption  yield  a  satisfaction 
equal  to  the  figure  10  [10  what?  At  any  rate  a  social  marginal  utility]. 
The  value  of  the  harvest  will  be  calculated  as   1,000,000X10." 

"The  various  things  that  determine  money  value  to  the  individual 
are  the  following :  .  .  .  .  the  amount  of  money  which  is  at  his 
disposal ;  the  nature  and  quantity  of  the  goods  which  can  be  obtained 


328  VALUE  AND  DISTRIBUTION 

On  page  fifty-one  we  read: 

When  we  speak  generally  of  the  value  of  goods  we  mean  the 
economic  rank  given  them  by  their  prices Some  particu- 
lar designation  is  indispensable  for  the  ranking  of  goods  in  economic 
exchange,  and  it  is  impossible  to  find  any  other  designation  than 

that   of    Wert The    word    Wert    alters    its    original    sense 

somewhat  when  transferred  from  the  subjective  relation  to  wants 
to  the  objective  relation  to  price.  Subjective  Wert  represents  a  dis- 
tinct feeling;  that  of  being  dependent  upon  the  possession  of  a 
good  for  the  satisfaction  of  a  want — a  distinct  degree  of  personal 

interest    in    goods Objective     Wert    or    price    is    not    in 

the  least  the  expression  of  the  economic  valuation  of  goods,  even 
when  it  is  the  result  of  economic  competition,  and  of  the  individual 
valuations  of  all  the  different  members  of  the  economic  com- 
munity.    Price  is  a  social  fact,  but  it  does  not  denote  the  estimate 

under  the  existing  market  conditions  and  prices  ;  the  utility  [marginal] 
which  these  goods  are  able  to  give,  as  also  the  utility  already  secured 
by  possessions  otherwise  acquired  ;  and,  lastly,  the  urgency  of  demand" 
(p.  46). 

"In  each  kind  of  production  good,  taken  by  itself,  the  value  of  the 
product  is  adjusted  to  the  level  of  its  particular  marginal  utility" 
[intended  as  a  colJectivist  computation,  with  a  collectivist  marginal 
utility;  but  what  about  displacement   and  cost  here?]    (p.   97). 

Confusions  of  marginal  utility  with  subjective  value,  and  with 
demand  price : 

"The  law  of  value  [market  value  here,  as  the  context  shows] 
unites  the  conceptions  of  value  and  of  utiHty  in  a  way  which  is 
fully  confirmed  by  the  facts :  .  .  .  .  and  it  only  remains  for  us  now  to 
combine  the  fact  of  costs  with  the  law  of  marginal  utility"   (p.  26). 

"The  law  of  price  is  nearly  related  to  the  law  of  value.  The  value 
of  a  stock  consisting  of  separate  items  is  determined  as  a  marginal 
value,  according  to  the  marginal  utility  of  the  single  good."  [Seem- 
ingly a  subjective- worth  computation  for  one  consumer  ;  in  such  case, 
not  the  whole  stock,  but  only  any  one  item  gets  valued  in  the  way 
asserted.]  "The  price  of  a  stock  which  is  sold  in  separate  items  is  also 
determined  as  a  marginal  amount,  according  to  the  purchasing  power 
of  the  marginal  buyer  of  the  single  good"  (p.  43).  [Here  there  is 
careful  avoidance  of  making  price  and  marginal  utility  equivalent  :  price 
is  marginal  purchasing  power  ;  but  on  page  forty-seven  it  is  said  that, 
whether  for  goods  or  for  money,  "it  is  demand  and  supply,  as  these 
express  themselves  in  marginal  utility,  that  decide  the  exchange  value."] 

"The  estimate  of  value  [here  evidently  subjective  worth]  leads 
us  back  to  use  value,  and  again  the  law  of  marginal  utility  holds" 
(p.  48). 

"The  rich  man,  therefore,  will  not  value  his  coat  according  to 
its  utility,  but  according  to  the  cost  of  procuring  it ;  in  his  estima- 
tion this  cost  will   stand  lower  than   the  utility All  household 

goods,  which  when  lost  or  stolen,  can  be  replaced  by  purchase,  are 
thus  valued"   (p.  49). 


THE  MODERN  MOVEMENT  329 

put    upon    goods    by    society Relations    of    price    and    of 

objective  Wert  do  not  in  the  least  correspond  with  the  relative 
position  of  the  two  goods  in  regard  to  their  economic  importance 

or    subjective    valuation [But]     exchange    value     taken    by 

itself   and   unrelated   to    subjective   value   is    unintelligible 

To  explanation,  subjective  value  is  chief  in  importance  because  only 
through  it  can  exchange  value  be  reached. 

All  this  is  admirable ;  btit  turning  back  to  page  thirty- 
four  before  there  had  been  any  talk  of  subjective  value  or 
of  subjective  anything,  but  only  of  value  as  referring  to 
general  market  transactions,  we  read : 

Value    is    the    form    in    which    utility    is    calculated It 

is  difficult  indeed  to  estimate  the  utility  of  a  stock;  easy  to  estimate 
its  value.  That  is  to  say,  the  value  of  a  stock  can  be  expressed  as 
the  single  product  of  stock  and  marginal  utility;  it  is  a  multiple  of 
the  marginal  utility;  whereas  utility  can  be  expressed  only  by  a 
sum  which  contains  as  numerous  and  as  various  amounts  as  the 
stock  contains  items.^"  The  utility,  for  instance,  of  a  harvest  of  a 
million  quarters  can  be  represented  only  by  an  almost  inexhaustible 

description   of   all   the   benefits   accruing    from   it The   value 

of  the  same  harvest  is  easily  and  shortly  ascertained  by  multiplying 
the  utility  of  the  marginal  employments  by  the  whole  amount. 

But  on  page  sixty-two  better  doctrine  is  found,  doctrine 
also  of  the  highest  of  importance  as  putting  the  finishing 
touches  to  our  present  discussion : 

In  natural  value  [ideal  collectivist  value]  goods  are  estimated 
according  to  their  marginal  utility ;  in  exchange  value,  according  to 
a  combination  of  marginal  utility  and  purchasing  power. 

Passing  over  the  objection  that  there  can  be  no  social 
marginal  utility  in  any  other  than  a  rough  average  sort, 
it  is  of  supreme  importance  to  note  that  here  is  an  abandon- 
ment, as  complete  and  unambiguous  as  that  with  Boehm- 
Bawerk,  of  marginal  utility  as  value  measure  or "  value 
determinant.  No  matter  how  frequently  Wieser  has 
asserted  and  will  assert  the  contrary,  there  is  no  under- 
standing of  the  real   force  and  meaning  of  the  Austrian 

*°  That  the  value  of  a  stock  is  the  product  of  marginal  utility  by 
the  number  of  items  can  from  no  point  of  view  be  true  unless  by 
interpreting  marginal  utility  into  marginal  cost  or  marginal  value,  as 
in  fact  Wieser,  like  Boehm-Bawerk,  does ;  marginal  utility,  marginal 
cost,  marginal  utility  value,  and  subjective  value,  all  appear  to  analyze 
into  the  same  thing,  and  exchange  value  also  is  prone  to  edge  its 
way  in. 


330  VALUE  AND  DISTRIBUTION 

doctrine  without  accepting  this  truth.  The  point  of  view 
does  not  make  for  marginal  utiHty  as  the  gist  of  the  value 
concept  or  as  underlying  it,  otherwise  than  as  an  inter- 
mediate step  toward  arriving  at  the  purely  explanatory  and 
tributary  concept  of  subjective  worth.  Exchange  value, 
estimated  or  expressed  or  fixed  or  worked  out  "according 
to  a  combination  of  marginal  utility  and  purchasing  power," 
becomes  not  marginal  utility  or  marginal  subjective  valua- 
tion, but  marginal  relative  utility,  that  is,  marginal  sacrifice, 
marginal  buyer's  offer  price,  or  marginal  seller's  demand 
price.*^ 

SUBJECTIVE    EXCHANGE   VALUE 

'Subjective  exchange  value  is  defined  by  Boehm-Bawerk 
as  "The  importan.ce  which  a  good  obtains  through  its 
capacity  to  procure  other  goods  by  way  of  exchange." 

In  view  of  the  non-relativity  of  the  concept  of  subjec- 
tive value,  there  is  nothing  further  to  be  urged  here  against 
the  use  of  the  term  value  for  this  new  concept ;  and,  in  the 

"  It  may  by  this  time  be  taken  as  established  that  neither  in  pain 
nor  in  utility,  whether  as  value  determinant  or  as  value  denominator,  is 
there  any  place  of  abiding  or  hope  of  rest  for  the  investigator  of  value. 
But  even  were  it  otherwise,  were  it  in  any  way  possible,  cause-wise  or 
denominator-wise,  or  both,  to  resolve  value  into  a  homogeneous 
medium  of  pain  cost  or  of  utility  demand,  what,  after  all,  would  it 
all  profit  ? 

The  scientific  instinct  for  unification  is  undeniably  strong ;  to  it, 
indeed,  is  traceable  the  larger  part  of  all  accomplishment  in  thought 
and  in  research.  When,  if  ever,  the  ultimate  atom  or  electron  of 
matter  is  discovered,  or,  in  the  tentative  manner  of  scientific  generali- 
zation, is  credibly  assumed  as  a  working  hypothesis,  the  fact  will  be  one 
of  no  small  moment,  even  though  everything  be  yet  to  learn  as  to  the 
ultimate  nature  of  this  ultimate  atom.  So  also,  were  it  really  necessary 
and  at  the  same  time  credibly  possible  and  approximately  intelligible  to 
accept  or  to  suppose  a  social  pain  unit  or  a  social  pleasure  item,  or 
did  it  in  any  sort  advance  the  case  to  compute  some  average  level 
of  pain  experience  or  of  pleasure  experience  and  to  conceive  of  this 
average  level  as  homogeneous  in  a  degree  to  permit  of  some  typical 
or  normal  or  standard  or  average  unit-resultant,  and  were  there  no 
other  method  of  making  intelligible  and  manageable  the  phenomena 
with  which  economic  science  has  to  deal,  and  were  the  new  fields  of 
research  thus  thrown  open  for  entry  as  attractive  as  the  old  fields 
made  necessary  of  abandonment, — the  pain-jelly  or  the  pleasure-jelly 
hypothesis — it  not  at  all  mattering  which — would  impose  itself  upon 
our  acceptance. 

But  it  is  first  to  be  noted  that  the  entire  marginal  analysis,  for 
whatever  it  has  accomplished  and  for  whatever  it  promises,  would 
be  first  among  the  things  to  be  abandoned  ;  and  this  would  involve  not 


THE  MODERN  MOVEMENT  33^- 

German,  Wert  may  be  the  only  resource  for  the  case,  if 
there  is  occasion  or  justification  of  any  sort  for  the  new 
concept.  The  use  of  the  new  term  seems  to  have  been 
responsible  for  the  adoption  of  objective  exchange  value; 
there  being,  by  assumption  or  enactment,  a  subjective 
exchange  value,  the  interests  of  symmetry  now  impose  a 
longer  and  more  cumbersome  term  in  place  of  market 
value,  but  with  no  added  significance,  other  than  that  of 
contrast  with  subjective  exchange  value. 

But  the  fact  appears  to  be  that  "subjective  exchange 
value"  is  absolutely  without  serviceability  in  the  value 
investigation ;  it  is  a  case  of  purely  gratuitous  distinction- 
drawing  and  term-making,  and  this  in  face  of  Boehm- 
Bawerk's  oft-quoted  confession  that  he  "would 
gladly  exchange  these  pedantic  and  clumsy  expres- 
sions, etc. ;  .  .  .  .  but  ....  use  value  and  exchange 
value  are  not  suitable  at  all,  because,  as  we  shall  see,  there 
is  a  subjective  exchange  value."  *^ 

merely  the  loss  of  those  contributions  distinctly  to  be  credited  to  the 
modern  movement,  but  also  the  entire  Ricardian  land-rent  doctrine, 
and  together  with  this  the  complete  scheme  of  marginal  cost  in  its 
relation   to   value. 

But,  finally,  what  is  it  that  this  labor-jelly  or  pain-jelly  or  utility- 
jelly  hypothesis  can  offer  us?  In  no  sense  a  homogeneous  medium  into 
which  all  costs  or  all  services  may  be  resolved,  but  a  homogeneity 
supposedly  actual  and  valid  only  for  the  marginal  cases.  The  truth  is, 
then,  that  nowhere  are  the  glittering  promises  in  the  way  of  being 
kept ;  the  thing  that  is  tendered  is  not  the  thing  held  out  as  in  prospect. 
Nor  is  there  offered  any  substitute  for  the  thing  promised,  but  rather  a 
relinquishment  of  it ;  for  of  what  service  would  be  this  mere  fringe  of 
homogeneity  at  the  lower  edge  of  the  wide  value  tract?  How  does 
any  alleged  general  value  determination  by  the  marginal-cost  item  come 
to  recommend  itself  to  be  a  resolution  of  all  the  non-marginal  cases 
into  an  equality  in  pain  origin  or  in  service  offering?  In  its  very 
terms,   this    solution   turns   out   upon    examination    to   be   a   no-solution. 

But  if  it  is  indeed  true, — and  it  is  no  part  of  the  present  purpose  to 
deny  it, — that  for  the  various  and  different  market  demands  to  come 
jointly  to  bear  upon  market  value,  they  must  find  a  way  to  get  them- 
selves aggregated  ;  and  if  it  is  true  that  costs  as  bearing  upon  value 
must  likewise  become  comparable  and,  for  the  purpose,  homogeneous  ; 
and  if  men  imperatively  need  in  their  commercial  affairs  some 
generalized  form  of  value  expression,  a  language,  a  standard,  a  denomi- 
nator, it  is  fairly  to  be  urged  that  in  the  system  of  price-offer,  price- 
refusal  terms,  a  money-price  rendering  of  value,  and  a  money  standard 
of  deferred  payments,  the  precise  thing  required  is  offered  and  is 
attained.  More  cannot  be  had,  and  were  more  to  be  had,  there  would 
be  no  need  for  it. 

*^  Positive  Theory,  p.   130,  note. 


332  VALUE  AND  DISTRIBUTION 

But  the  adoption  of  the  new  term  is  more  than  merely 
gratuitous ;  it  is  bad  in  logic ;  it  involves  the  absurdity  of 
asserting  that  the  utility  of  the  cow  that  you  sell  is,  after  all, 
not  the  utility  of  the  cow,  but  the  utility  of  the  horse  which 
you  receive^  in  return.  And  doubtless  this  is  true  in  a  sense, 
though  it  seems  to  leave  the  cow  strangely  iDereft  of  any 
utility  whatever,  unless  perhaps  that  previously  contentedly 
possessed  by  her,  but  now  repudiated  and  cast  off,  or, 
possibly,  appropriated  by  the  horse.  This  recalls  the  pro- 
cedure by  which  the  utility  of  the  overcoat  was  suddenly 
reduced  from  20  to  10  by  the  mere  fact  that  it  could  be  had 
for  10. 

The  truth  appears  to  be  that  the  notion  of  quasi-rents, 
buyer's  or  other,  is  sufficient  for  all  cases  presenting  this 
aspect  of  the  differential  principle.  And  the  concept  indi- 
cated by  the  term  is  really  needed  to  explain  the  demand 
for  goods,  the  forward-looking  attitude  toward  exchange, 
and  the  degree  and  kind  of  the  purchase-elasticity. 

Let  it,  for  example,  be  taken  as  true  that,  having  no  coat, 
one  would,  if  necessary,  pay  twenty  dollars  for  a  coat,  but 
needs  pay  only  ten ;  or  that,  having  a  coat  of  a  twenty- 
unit  power  of  service,  one  could,  if  he  lost  it,  replace  it  at 
ten.  Doubtless  one  may  say  that  the  subjective  worth  is 
10,  but  this  10  is  obviously  not  well  adapted  to  serve  as  an 
expression  of  the  bidding  disposition ;  20  is  still  the  maxi- 
mum bid;  to  place  the  utility  at  10  leaves  it  strangely  stand- 
ing as  true  that  one  is  willing,  if  necessary,  to  bid  the  price 
up  to  twice  the  utility. 

But  this  is  not  the  worst  of  the  bad  logic.  Subjective 
exchange  worth,  like  marginal  utility  and  subjective  worth, 
must  justify  its  existence  in  economic  terminology  through 
its  service  as  tributary  to  the  explanation  of  market  value, — 
as  a  term,  standing  for  some  intermediate  analysis  subsid- 
iary to  the  elucidation  of  the  problem  under  investigation. 
On  any  other  basis  each  of  these  terms  is  an  impertinence. 

But  unfortunately  for  subjective  exchange  value,  it  is 
an  ex  post  facto  concept,  a  term  derivative  from  the 
exchange  transaction,  and  expressing  the  advantages 
derived  from  it ;  as  such,  it  loses  all  importance  as  helping 
in  the  explanation  of  the  terms  of  the  exchange.  It  substi- 
tutes the  backward-looking  view  for  the  forward  and 
recalls  little  Alice  of  the  looking-glass  experience,  who 
used  to  cry  before  she  had  cut  her  finger,  and  having  cut 


THE  MODERN  MOVEMENT  333 

it,  laughed,  the  pain  being  over;  and  who  occasionally  lost 
much  time  rapping  upon  the  door  to  get  in  when  she  was  in 
already. 

Both  Wieser  and  Boehm-Bawerk  stand  for  the  subjec- 
tive-worth concept.  And  Wieser  applies  here  something  like 
the  foregoing  logical  methods  in  his  attempt  to  demonstrate 
not  merely  that  subjective  worth  is  a  necessary  concept  in 
the  elucidation  of  market  value — as  in  fact  it  is — but  that 
it  is  adequate  thereto — as  in  fact  it  is  not.  Without  this 
absolute-magnitude  kind  of  value  for  each  of  the  two 
things  to  be  compared,  there  could,  he  rightly  argues,  be 
nothing  to  compare.  Each  must  be  worth-estimated 
separately,  and  then  a  comparison  of  them  made,  before, 
as  a  result,  a  readiness  for  exchange  may  be  reached.  The 
exchange  advantage  expresses  itself  as  the  greater  absolute 
magnitude  of  the  so-called  objective  exchange  value 
over  the  direct — the  subjective — value.  True,  the  compari- 
son is  ordinarily  made  through  money ;  but  accurately  the 
subjective  exchange  value  of  my  cow  is  not  in  the  money, 
but  in  that  which  I  shall  purchase  with  the  money,  e.  g., 
a  horse,  regarded  in  its  aspect  of  direct  subjective  value, 
as  an  absolute  satisfaction  magnitude. 

And  so,  by  finding  two  subjective  values,  by  comparing 
them,  and  then  attributing  the  second  value  to  the  first, 
thereby  returning  to  a  non-relative  fact ;  having,  that  is, 
once  used  the  relationship  and  then  dropped  it,  or  lost  it 
by  absorption,  Wieser  concludes  that  he  has  all  the  while 
been  within  the  field  of  absolute  magnitudes.*^ 

*^  Natural  Value,  pp.   50,   53,   note. 


CHAPTER  XVIII 

CLASSICAL  VERSUS   MODERN    (DIETZEL  VS.   BOEHM- 
BAWERK) 

It  is  commonly  stated  that  in  the  early  seventies  three 
different  investigators,  Menger,  Jevons,  and  Walras,  work- 
ing- independently  and  in  different  languages,  arrived  at 
practically  identical  positions  in  their  reformulation  of 
economic  doctrines.  That  there  was  practical  identity  in 
point  of  view — in  the  emphasis  on  demand  as  against  sup- 
ply, and  upon  utility  as  fundamental  to  cost — and  that  the 
marginal  method  in  the  analysis  of  market  adjustments 
was  common  to  all  three,  must  be  admitted ;  and  this  is  a 
degree  of  similarity  sufficiently  remarkable. 

But  the  divergencies  were  important  enough  to  influ- 
ence greatly  the  subsequent  development  of  the  derived 
lines  of  thought.  Jevons  made  only  slight  attempt  at  analy- 
sis of  the  phenomena  of  individual  valuation,  and,  whether 
for  better  or  for  worse,  is  only  in  the  slightest  degree  respon- 
sible for  the  beginning  and  the  growth  of  the  doctrine  of 
subjective  worth.  For  the  most  part,  Jevons'  work  was  in 
the  field  of  market  value,  and  especially  of  the  distributive 
categories  derivative  from  the  value  concept.  Menger's 
work  is,  on  the  other  hand,  mainly  restricted  to  the  field  of 
subjective  valuation  and  subjective  value — worth  in  the 
individual  schedule.^ 

'  Jevons  and  Walras  are  on  the  whole  much  alike  both  in  point 
of  view  and  in  method  of  treatment ;  for  the  purposes  in  hand  their 
positions  are,  indeed,  practically  identical  ;  that  is  to  say,  neither  does 
anything  of  appreciable  significance  distinctly  within  the  field  either 
of  subjective  worth  or  of  subjective  valuation  in  the  accurate,  the 
relative,  sense.  Both  directed  attention  especially  to  the  marginal 
analysis,  and,  without  attempt  to  examine  into  the  precise  nature  of 
the  margin,  employed  the  principle  of  the  satiability  of  desire  as 
explanation  of  the  principle  of  marginal  utility  in  the  demand  curve. 
As  against  himself,  Walras  accords  priority  in  time  to  both  Gossen  and 
Jevons,  so  far  as  refers  to  the  leading  principles  of  the  method  and  to 
the  point  of  view,  but   regards  himself  as  having  made  some  fields  of 

334 


CLASSICAL  VERSUS  MODERN  335 

The  later  doctrine  has  been  developed  mostly  along  the 
lines  of  Menger's  analysis,  and  chiefly  by  his  convinced 

the  development  and  the  application  of  the  theory  peculiarly  his  own  : 
"This  half-volume  was,  indeed,  prepared  and  almost  entirely  printed, 
and  I  had  communicated  the  main  points  of  the  theory  herein  expounded 
to  the  Academy  of  Moral  and  Political  Sciences  at  Paris,  when,  a 
month  since,  I  made  the  acquaintance  of  a  treatise  upon  the  same 
subject,    entitled    The    Principles    of    Political    Economy,    published    in 

1873    ....   by    Mr.    W.    Stanley    Jevons Like    myself,    this 

author  applies  the  mathematical  analysis  to  pure  economics,  and 
especially  to  the  theory  of  exchange ;  and — a  truly  remarkable  fact — 
bases  the  entire  reasoning  upon  a  fundamental  formula,  which  he 
terms  the  equation  of  exchange,  which  is  rigorously  identical  with  that 
which  has  served  me  as  point  of  departure,  and  which  I  call  the 
condition  of  niaximuin  satisfaction.  Mr.  Jevons  has  especially  directed 
his  attention  to  the  general  and  philosophical  exposition  of  the  new 
method  and  to  laying  the  foundations  of  its  application  to  the  theory 
of  exchange  and  to  the  theories  of  labor,  of  rent,  and  of  capital.  As 
for  myself,  I  have  made  especial  effort  to  make  thorough  exposition  of 
the  mathematical  theory  of  exchange.  This  leaves  me  in  duty  bound 
to  ascribe  the  priority  of  formulation  to  Mr.  Jevons,  the  while  reserving 

to  myself  some  claim  to  several  important  deductions In  my 

opinion,  Mr.  Jevons'  work  and  my  work,  so  far  from  antagonizing  each 
other,  confirm  and  complete  and  essentially  strengthen  each  other." — 
Leon  Walras,  Preface  to  Elements  dEconomic  Politique  Pure,  4th 
ed.,   1900. 

There  is,  then,  from  the  point  of  view  of  the  present  investigation, 
no  especial  call  for  detailed  report  or  criticism  of  either  Jevons  or 
Walras.  Their  mathematical  forms  of  statement  and  method  of 
investigation,  if  there  really  be  a  separate  method,  serve  to  make  the 
task  one  as  impracticable  for  the  present  writer  as  it  would  probably 
turn  out  to  be  unserviceful  to  the  reader. 

Walras'  rendering  of  the  marginal-utility  doctrine  makes  a  dis- 
tinction between  extensive  utility  and  intensive  utility ;  a  commodity  has 
extensive  utility  up  to  the  point  where  no  more  of  it  will  be  consumed 
even  upon  terms  of  being  offered  gratis  ;  intensive  utility  is  the  sort  of 
utility  that  influences  the  demand  curve  {ibid.,  p.  73).  "We  call  the 
utility  intensive  because  of  the  fact  that  the  commodity  responds  to 
needs  more  or  less  intense  and  pressing,  accordingly  as,  with  a 
greater  or  smaller  number  of  men,  these  needs  persist,  despite  the 
height  of  the  price,  and  persist  more  or  less  strongly  with  different 
men  ;  because,  that  is  to  say,  the  importance  of  the  sacrifice  to  be  made 
to  procure  the  commodity  has  more  or  less  influence  upon  the  quantity 
of  the  commodity  consumed"  {ibid.,  p.  73). 

All  of  which  amounts  to  reducing  the  different  demands  of 
different  individuals  to  a  homogeneity  of  utility ;  thence  comes  the 
interpretation  of  the  demand-price  curve  as  a  mere  intensity-of-utility 
curve. 

Based  upon  this  line  of  reasoning,  the  further  development  of  the 


33^  VALUE  AND  DISTRIBUTION 

pupils   or   disciples.      Therefore,   in   the   interests   both   of 
effectiveness  of  exposition  and  of  economy  of  space,  it  has 

marginal-utility  analysis  is  easily  foretold  ;   market  value  and  marginal 
utility  become  coincident   quantities. 

But  it  is  still  to  be  noted  that  all  of  this  analysis  proceeds  upon 
the  assumption  of  existing  and  temporarily  fixed  supplies  of  goods, 
that  is  of  goods  unaffected,  for  the  time  being,  by  influences  of  cost. 
This  was  also  the  method  of  Jevons,  the  further  problem  being  to 
analyze  and  formulate  the  cost  influences  in  their  relation  to  supply, 
VValras,  as  it  seems  to  this  writer,  gets  not  much  farther  toward  the 
solution  of  the  problem  than  a  more  or  less  inadequate  formulation  of 
it:  '"In  a  word,  it  remains  to  decide  whether  it  is  the  price  of 
ilie  productive  services  that  determines  the  price  of  the  product,  or  rather 
the  price  of  the  product,  determined  as  we  have  seen  through  the  law 
of  demand  and  supply,  that  determines  the  price  of  the  productive 
services,  by  virtue  of  the  law  of  cost  of  production,  the  pri.v  de  revient" 
(ibid.,  p.  176), 

As  for  Jevons,  it  is  further  to  be  said  that  in  numerous  cases  he 
impliedly  or  explicitly  adopts  the  notion  of  a  social  utility ;  that  he 
repeatedly  makes  the  feeling-quantities  of  different  men  both  comparable 
and  commensurable  ;  and  that  he  repeatedly  identifies  marginal  utility 
with  marginal  offer  price  ;  and  that  his  general  reasoning  involves  of 
necessity  each  and  all  of  these  assumptions.  It  is  nevertheless  true 
that,  in  more  careful  analyses  and  formulations,  each  of  these  positions 
is  repudiated  and  the  correct  doctrine  accorded  adequate  recognition. 
A  few  questions  must  suffice  under  these  heads : 

SOCIAL      UTILITY,      COGNATE      TO      THE      SOCIETY-AS-AN-ORGANISM      DOCTRINE 

"In  a  time  of  scarcity  the  utility  of  barley  as  food  might  rise  so 
high  as  to  exceed  altogether  its  utility,  even  as  regards  the  smallest 
quantity,  in  producing  alcoholic  liquors.  In  a  besieged  town  the  employ- 
ment of  articles  becomes  revolutionized." — Theory  of  Political 
Economy,  3d  ed.,  London,  1888,  p.  61. 

"We  are  now  in  position  to  appreciate  perfectly  the  difference 
between  the  total  utility  of  any  commodity  and  the  degree  of  utility  of 
the  commodity  at  any  point"   (ibid.,  p.  49). 

"The  laws  which  we  have  to  trace  out  are  to  be  conceived  as 
theoretically  true  of  the  individual ;  they  can  only  be  practically 
verified  as  regards  the  aggregate  transactions,  productions, 
and  consumptions  of  a  large  body  of  people.  But  the  laws 
of  the  aggregate  depend  of  course  upon  the  laws  applying  in  individual 
cases"    (ibid.,   p.   48). 

THE    FEELINGS    OF    DIFFERENT     MEN     MADE     COMMENSURATE    AND 
HOMOGENEOUS 

"In  Paris  [in  the  siege  of  '70I  ^  vast  stock  of  horses  were  eaten, 
not  so  much  because  they  were  useless  in  other  ways,  as  because  they 
were  needed  more  strongly  as  food.  A  certain  stock  of  horses  had, 
indeed,  to  be  retained  as  a  necessary  aid  to  locomotion,  so  that  the 
equation  in  the  degrees  of  utility  never  wholly  failed"   (ibid.,  p.  61). 

"Suppose   that  the   rate   of  exchange   is  approximately  that   of   ten 


CLASSICAL  VERSUS  MODERN  337 

again  seemed  desirable  not  only  to  violate  the  time  sequence 
in  the  development  of  doctrine,  but  to  accord  scant  recogni- 

pounds  of  corn  for  one  pound  of  beef ;  then  if,  to  the  trading  body 
which  possesses  corn,  ten  pounds  of  corn  are  less  useful  than  one  of 
beef,  that  body  will  desire  to  carry  the  exchange  farther.  Should  the 
other  body  possessing  beef  find  one  pound  less  useful  than  ten  pounds 
of  corn,  this  body  will  also  be  desirous  to  continue  the  exchange. 
Exchange  will  thus  go  on  until    ....   loss  of  utility  would  result  if 

more   were   exchanged The    degrees    of   utility    have    come    to 

their  level,  as  it  were"   (ibid.,  p.   96). 

"  ....  In  other  words,  if  increments  of  commodity  be 
exchanged  at  the  established  ratio,  their  utilities  will  be  equal  for 
both  parties"   (ibid.,  p.  96). 

But,  "No  attempt  is  made  to  compare  the  amount  of  feeling  in 
one  mind  with  that  in  another.  I  see  no  means  by  which  such  a 
comparison  can  be  accomplished.  The  susceptibility  of  one  mind  may, 
for  what  we  know,  be  a  thousand  times  greater  than  that  of  another. 
But,  provided  the  susceptibility  was  greater  in  like  ratio  in  all  direc- 
tions,   we    should    never    be    able    to    discover    the    difference 

Between  A  and  B  there  is  a  gulf  fixed.  Hence  the  weighing  of  motives 
must  always  be  confined  to  the  bosom  of  the  individual"   (ibid.,  p.  14). 

"The  general  forms  of  the  laws  of  economics  are  the  same  in  the 
case  of  individuals  and  of  nations  ;  and,  in  reality,  it  is  a  law  operat- 
ing  in  the   case   of  multitudes   of   individuals   which   gives   rise   to    the 
aggregate  represented  in  the  transactions  of  a  nation.    .....   The  use 

of  an  average,  or,  what  is  the  same,  an  aggregate  result,  depends  upon 
the  high  probability  that  accidental  and  disturbing  causes   will  operate 
in     the     long     run  ....   so     as     to     neutralize     each     other"      (ibid., 

pp.   15,    16). 

MARGINAL     UTILITY     IDENTICAL     WITH     MARKET     PRICE 

"We  shall  seldom  need  to  consider  the  degree  of  utility  except  as 

regards    the    last    increment I    shall    therefore    commonly    use 

the  expression  final  degree  of  utility,  as  meaning  the  degree  of  utility 
of  the  last  addition,   or   the   next   possible   addition   of  a  very   small,   or 

infinitely  small,  quantity  to   the  existing   stock We   may   know 

the  degree  of  utility  at  any  point  while  ignorant  of  the  total  utility" 
(ibid.,  p.    sO- 

"The  value  of  a  divisible  commodity  is  measured  not,  indeed,  by 
its  total  utility,  but  by  its  final  degree  of  utility"  (ibid.,  p.  137). 

"Value  depends  solely  upon  the  final  degree  of  utility.  How  can  we 
vary  this  degree  of  utility,  etc.?"   (ibid.,  p.   164). 

But  on  page  141  :  "The  general  result  of  exchange  is  thus  to 
produce  a  certain  equality  of  utility  between  different  commodities,  as 
regards  the  same  individual  ;  but  between  different  individuals  no  such 

equality    will    tend    to    be   produced The   degree   of   utility   of 

wealth   to   a  very   rich   man,   etc." 

Marshall's  well-known  note  (Principles,  Book  V,  chap,  xiv)  admir- 
ably discusses  Jevons'  remark  (Theory,  p.  i)  :  "Repeated  reflection 
and  inquiry  have  led  me  to  the  somewhat  novel  opinion  that  value 
depends  entirely  upon  utility" — saying — "A  trading  body  is  not  a  person  ; 


338  VALUE  AND  DISTRIBUTION 

tion  to  personal  questions  of  priority  or  of  originality  in  the 
progress  of  this  doctrinal  evolution.  That  the  works  of 
Wicser  and  Boehm-Bawerk  stand  today  as  the  most  au- 
thoritative expression  of  what  is  characteristic  and  domi- 
nant in  the  unfolding  of  Austrian  theory  must  serve  as 

it  gives  up  things  that  represent  equal  purchasing  power  to  all  of  its 
members,  but  very  different  utilities.  It  is  true  that  Jevons  was  him- 
self aware   of  all  this Jevons'   antagonism   to    Ricardo   and    Mill 

would  have  been  less  if  he  had  not  himself  fallen  into  the  habit  of 
speaking  of  relations  which  really  exist  between  demand  price  and 
value  as  though  they  held  between  utility  and  value." 

Jevons'  account  of  the  relation  of  cost  to  value  needs  some  slight 
attention  at  this  point.     Does  cost  fix  value  or  value  cost? 

"Wages  are  governed  by  the  same  formal  laws  as  rents 

So  far  as  cost  of  production  regulates  the  values  of  commodities,  wages 
must  enter  into  the  calculation  on  exactly  the  same  footing  as  rent." — 
Op.  cit.,  Preface,  p.  xvi. 

"When  labor  is  turned  from  one  employment  to  another,  the 
wages  it  would  otherwise  have  yielded  must  be  debited  to  the  expenses 
of  the  new  product.     Thus  the  parallelism  between  the  theories  of  rent 

and  interest  is  seen  to  be  perfect  in  theory Precisely  the  same 

view  may  be  applied,  mutatis  mutandis,  to  the  rent  yielded  by  fixed 
capital,  and  to  the  interest  of  free  capital"   (ibid.,  p.  xlix). 

"Value  depends  solely  on  the  final  degree  of  utility.  How  can  we 
vary  this  degree  of  utility?  ....  By  having  more  or  less  of  the 
commodity  to  consume.  And  how  shall  we  get  more  or  less  of 
it?   .    .    .    .By      spending      more      or      less      labor      in      obtaining      a 

supply I    hold    labor    to    be    essentially    variable,    so    that    its 

value  must  be  determined  by  the  value  of  the  produce,  not  the  value 
of  the  produce  by  the  value  of  the  labor"   (ibid.,  pp.   164,   165). 

Then,  having  treated  the  production  margin  as  an  equilibrium 
between  the  labor  pain  of  production  and  the  pleasures  attaching  to 
the  possession  or  consumption  of  the  product, — "labor  will  be  carried  on 
till  the  increment  of  utility  ....  just  balances  the  increment  of 
pain,"  he  continues:  "The  preceding  theories  lead  directly  to  the 
well-known  law,  as  stated  in  the  ordinary  language  of  economists,  that 
value  is  proportioned  to  the  cost  of  production As  the  incre- 
ment of  labor  considered  is  always  the  final  one  ....  articles  will 
exchange  in  quantities  inversely  as  the  costs  of  production  of  the  most 
costly  portions,  i.e.,  the  last  portions  added"  (ibid.,  p.  186):  Which 
sums  up  in  accepting  all  of  what  is  most  pernicious  in  the  labor-cost 
doctrine,  viz.,  the  abandonment  of  entrepreneur  cost,  the  adoption  of 
pain  cost,  and  the  jellification  of  labor.  It  may  be  here  noted  that 
Pantaleoni  concurs  in  this  labor-pain-cost  view  (Maffeo  Pantaleoni, 
Pure  Economics,  Macmillan,  1898,  p.  102),  as,  for  that  matter,  in  most 
other  of  Jevons'  errors,  e.g.,  in  his  constant  and  consistent  hedon- 
ism, and  in  the  repeated  identification  of  marginal  utility  with  marginal 
demand  and  with  market  value. 


CLASSICAL  VERSUS  MODERN  339 

justification   for  the   prominence — near  to  exclusiveness — 
given  to  these  two  writers  in  these  pages. 

Wieser  had  in  1884  pubHshed  his  Ursprung  und  Haupt- 
gesetzc  des  wirtschaftlichoi  IVertes,  and  had  been  by  Hein- 
rich  Dietzel  somewhat  scathingly  reviewed.  In  1885 
appeared  Boehm-Bawerk's  Capital  und  Capitakins,  and  in 
1886  the  Grundzuge  dcr  Theorie  des  wirtschaftlichcn  Gtt- 
terzverts.  In  1890,  and  before  the  pubhcation  of  the  Posi- 
tive Theorie,  was  published  Dietzel's  onslaught  upon  the 
newer  doctrine,  Die  klassische  W erttheorie  und  die  Theorie 
vom  Grensnutscn.  During  the  same  year  came  Dr.  Robert 
Zuckerkandl's  few  pages  of  reply,  and  a  short  note  from 
Boehm-Bawerk  formulating  certain  questions  which,  with 
their  answers  by  Dietzel,  were  intended  to  make  precise 
the  issues  to  be  debated.  Dietzel  promptly  replied  to  the 
questions  as  formulated,  and  in  1892  appeared  the  rejoinder 
of  Boehm-Bawerk. - 

The  entire  controversy,  and  especially  that  portion  of  it 
belonging  to  Dietzel  and  Boehm-Bawerk,  is  to  our  purpose 
as  serving  in  peculiarly  marked  degree  toward  bringing 
into  intelligible  statement  the  issues  between  the  two  points 
of  view. 

Dietzel's  review  of  Wieser  need  not  detain  us  here. 
The  later  and  more   formal  article,  Dietzel's  attack  upon 

^  1884,  Wieser,  Ursprung  und  Hauptgcsetze  des  wirtschaftlichen 
Wertes. 

1885,  Dietzel,  review  of  Wieser's  Ursprung  und  Hauptgesetze, 
Conrads  Jahrbiicher,  neue  Folge,  XI,    161. 

1885,  Boehm-Bawerk,  Capital  und  Capifahins. 

1886,  Boehm-Bawerk,  Griindzuge. 

1890,  Dietzel,  Die  klassische  Werttheorie  und  die  Theorie  vom 
Grenznutzen,   Conrads  Jahrbiicher,  N.   F.,  XX,    563. 

1890,  Zuckerkandl,  Reply,  Die  klassische  Werttheorie  und  die 
Theorie   vom   Grenznutzcn,    ibid.,    XXI,    509. 

1890,  Boehm-Bawerk,  Ein  Zzvischemvort  zur  Werttheorie,  ibid., 
XXI,  519. 

1 89 1,  Dietzel,  Zur  klassischen  Wert-  und  Preistheorie,  Conrads 
Jahrbiicher,  dritte  Folge,   I,  685. 

1892,  Boehm-Bawerk,  Wert,  Kosten  und  Grenznutzen,  ibid,,  III, 
321. 


340  VALUE  AND  DISTRIBUTION 

the  general  position  of  the  newer  school,  opens  with  the 
pardonable  error  of  assuming  that  Boehm-Bawerk's  doc- 
trine of  subjective  value  is  offered  as  somehow  a  workable 
doctrine  of  market  value.  Dietzel,  therefore,  directs  his 
attack  against  the  Austrians'  peculiar  ground  of  Crusoe 
conditions  and  of  purely  personal  analysis,  and  asks 
whether,  upon  these  terms,  value,  as  a  relation  between 
commodities,  is  a  question  of  marginal  utility  rather  than 
of  marginal  cost. 

And  Dietzel  makes  it  fairly  clear  that,  in  the  Crusoe 
economy,  the  only  possible  common  denominator  under 
which  freely  reproducible  goods  can  obtain  an  objective 
and  practicable  basis  of  comparison  must  be  the  labor-cost 
denominator.  True,  utility,  may,  for  goods  limited  in 
supply,  stand  as  the  best  thing,  because  the  only  thing, 
possible ;  but  when  the  good  can  be  reproduced  by  labor, 
labor  will  come  to  stand  as  the  cost ;  the  loss  of  the  good 
will  appeal  to  Crusoe  only  as  the  loss  of  the  labor  of 
replacement,  and  the  good,  no  matter  how  much  greater  its 
utility  may  be,  will  fall  to  the  value  rank  set  by  its  cost. 
And  Dietzel  points  out  that,  especially  with  goods  not  exist- 
ing in  stocks,  their  utility  affords  no  basis  of  comparison ; 
all  goes  over  to  cost  computations :  "Assume  that  the  cabin 
can  be  reproduced  in  lo  hours,  the  net  in  lo,  the  bow  in  8, 
the  food  supply  in  5  ;  Crusoe,  if  he  knows  anything  about 
how  to  figure  in  economic  fashion,  will  fix  the  Wert  of  the 
goods  at  the  figures  10,  10,  8,  5."  Suppose  Crusoe  to  need 
per  day  three  liters  of  water  and  ten  fish,  and  has  in  store 
three  days'  provision  of  each,  nine  liters  of  water,  and 
thirty  fish.  Will  he  appraise  the  water  and  the  fish,  rela- 
tively, according  to  their  respective  marginal  utilities?  If 
witii  five  hours  of  labor  he  can  get  nine  liters  of  water  or 
ten  fish,  he  will  be  indifferent  whether  he  lose  his  three 
days'  supply  of  water  or  his  one  day's  supply  of  fish. 

But  from  all  this — and  there  is  more  of  it,  and  of  a 
most  convincing  sort — it  is  evident  that  there  is  no  issue. 


CLASSICAL  VERSUS  MODERN  341 

In  the  Gniiidcugc,  Boehm-Bawerk  had  admitted  the  prin- 
ciple of  cost — of  substitution — and  had  even  gone  so  far  as 
to  say  that  the  utility  of  the  purchased  good  actually  was 
the  utility — the  subjective  worth — of  its  cost  good;  and 
where, — as  is  admitted  is  sometimes  the  case,  though  the 
rarity  of  it  appears  to  be  overstated, — the  method  of  replace- 
ment is  labor  pain,  labor  pain  was  admitted  to  be  the  cost. 

But  note  carefully  that  with  Boehm-Bawerk  this  labor 
pain  as  cost  leads  only  to  the  establishment  of  subjective 
ivorth;  with  Dietzel  labor  pain  becomes  a  relational,  com- 
mon-denominator, medium  fact.  What,  for  example,  does 
this  10,  10,  8,  5  series  of  figures  mean  to  Dietzel?  Simply 
relations  of  importance,  reflecting  the  relative  labor  require- 
ment; nothing  is  implied  by  Dietzel,  and  nothing  is  cared 
whether  the  services  from  possession  or  the  pains  from 
procurement  be  little  or  much ;  he  is  in  pursuit  of  a  com- 
mon denominator  and  a  basis  and  a  cause  for  precise  com- 
parison. But  with  Boefim-Bawerk  a  subjective  value  of  10 
means  a  certain  quantum  of  feeling,  so  much  pleasure,  or 
defense  from  so  much  pain,  a  definite  feeling- volume ;  and 
if  the  subjective  value  (worth)  of  this  10  of  pleasure  is, 
by  virtue  of  its  cost,  only  five,  this  5  likewise  is  a  non-rela- 
tional fact,  a  definite  quantum  of  pleasure  lost  or  of  pain 
accepted  in  order  to  obtain  or  to  retain  the  10  item  of  well- 
being  magnitude. 

And  therefore  the  simple  fact  is  that  there  is  no  issue. 
Dietzel  is  talking  of  the  relations  between  Crusoe's  utilities, 
his  Ui^er-valuations — to  accept  for  the  moment  the  Aus- 
trian view  of  the  terms,  while  Boehm-Bawerk  is  within  the 
field  of  absolute  magnitude.  Dietzel  is  in  the  field  of 
exchange  value ;  Boehm-Bawerk's  discussion  is  sub- 
jective-worth discussion. 

Dietzel's  attack  being  mostly  beside  the  point,  as  rais- 
ing no  issue,  the  reply  contributed  by  Dr.  Robert  Zucker- 
kandl,  at  that  time  Privat-Dozent  in  the  University  of 
Vienna,  could  have  no  great  significance  in  the  discussion. 
The  following  passage,  however,  deserves  record: 

It  is  an  error  to  suppose  that  the  later  value  school  has  seriously 
in  mind  the  basing  of  market  valuation  upon  the  analysis  of  the 
economics  of  isolation.  This  method  has  been  used  only  for 
readier  illustration  and  in  order  to  make  certain  phenomena  in 
actual    economic    life    more    fully    intelligible.      Beyond    this    the 


342  VALUE  AND  DISTRIBUTION 

isolated  economics  is  without  interest Actual  economic  life 

is  something  essentially  different  from  an  isolated  system,  and  what 
serves  in  the  one  as  a  rule  may  very  readily  in  the  other  be  only  an 
exception.  And  so,  if  the  labor  measure  were  taken  to  hold  for  the 
Crusoe  case;  little  would  follow  from  this  for  actual  affairs. 

Seemingly  in  entire  ignorance  of  Zuckerkandl's  con- 
tribution, Boehm-Bawerk  now  attempts  to  bring  the  con- 
troversy to  precise  issues,  and  thereupon  transfers  the 
whole  discussion  forthwith  to  the  market-vahie  field. 

Does  Dietzel  regard  the  "sum  of  labor"  in  production 
as  synonymous  with  cost  of  production,  or  does  he  mean 
by  "cost"  the  sum  of  the  various  different  costs  of  the 
entrepreneur,  in  which  the  labor  itself  figures  not  accurately 
as  total  but  only  as  one  value  item?,  (That  is,  does  Dietzel 
accept  entrepreneur  cost  as  the  significant  cost  category?) 

Answer:    The  latter,  the  entrepreneur  view,  is  accepted. 

Does  Dietzel  regard  the  value  of  the  cost  good  as  the 
cause  of  the  value  of  the  product,  or  is  the  product  value 
the  cause,  and  the  cost-good  value  the  effect? 

Answer :    Each  is  the  cause  of  the  other. 

Is  the  issue  merely  that  the  later  school  arrive  at  market 
price  out  of  the  worth  estimates  of  the  marginal  traders, 
and  only  round-about-wise  out  of  cost,  while  the  classical 
school  go  directly  to  the  cost  fixation? 

The  answer  is  not  quite  specific,  but  the  issue  is  stated 
to  be  upon  the  interpretation  and  treatment  of  costs. 

Does  Dietzel  regard  labor  as  a  valuable  good  falling 
under  the  cost-of-production  law,  and  as  fixed  in  value  by 
the  subsistence  cost  of  self -maintenance  and  of  rearing 
successors  ? 

Answer:     Yes,  in  the  long  adjustment. 

Dietzel  prefaces  these  answers  with  the  complaint  that 
while  he  had  taken  the  Austrians  upon  their  own  peculiar 
ground,  the  psychological  analysis  of  the  individual  eco- 
nomic life,  the  reply  is  merely  to  transfer  the  discussion 
to  the  field  of  competitive  trading;  in  all  of  which  com- 
plaint Dietzel  is  correct  enough,  but  for  the  fact  that  the 


CLASSICAL  VERSUS  MODERN  343 

isolated  analysis  is  not  conceived  by  the  Austrians,  at  their 
best,  as  basis  for  the  solution  of  the  market-value  problem, 
but  merely  as  preparation  for  the  problem. 

In  fact,  labor  cost,  as  the  solution  of  the  supply  side  of 
the  value  equation,  can  hardly  be  attacked  in  the  Crusoe 
system  of  things,  or  in  any  system  where  all  men  are  con- 
ceived to  be  precisely  alike.  Not  so,  however,  for  actual 
market  conditions ;  all  the  products  of  one  producer  may, 
both  in  cost  and  in  marginal  utility,  be  the  equivalent,  in 
subjective  worth,  of  the  day's-end  item  of  labor  applied, 
and  may  exchange  against  similarly  produced  and  meas- 
ured goods  of  another  producer.  The  goods  purchased  by 
either  man  will  then  be  obtained  through  this  marginal, 
day's-end,  labor  burden ;  that  is,  labor  cost  will  apply  for 
each  man  to  limit  his  volume  of  product  and  to  express  the 
importance  of  the  purchases  made  through  his  product; 
but  the  goods  produced  find,  for  their  utility  or  subjective 
worth,  no  measure  or  expression  in  the  ratios  at  which  one 
man's  products  exchange  against  the  other  man's 
products ;  the  quantities  of  time  respectively  devoted  by 
the  two  men,  the  burdens  undergone,  the  pleasures 
obtained,  will  have  in  the  market-value  expression  no 
relation  to  each  other. 

Dietzel  accepts  the  entrepreneur  notion  of  cost,  that  is, 
he  makes  cost  items  enter  into  the  computation  only  as 
reduced  to  terms  of  value.  Thus  far,  then,  there  is  for 
present  purposes  still  no  issue ;  though,  as  we  shall  later 
see,  the  Austrians  do  not  themselves  hold  consistently  to 
the  entrepreneur  analysis. 

But  upon  the  question  whether  market  value  is  the 
cause  or  is  the  effect  of  cost,  the  discussion  moves  toward 
more  definite  positions  of  disagreement.  Dietzel  does  not 
deny  that  cost  goods  derive,  in  a  sense,  their  values  from 
the  values  of  their  products : 

I  declare  plainly  that  ....  both  time  and  labor  powers 
derive  their  character  as  goods  from  their  usefulness,  only  not  an 
actual  but  a  potential  usefulness,  in  the  sense  that  they  are  the 
conditions  of  all  satisfaction  of  wants  and  of  all  creation  of 
utility;  further,  that  they  derive  their  character  of  economic  goods 
[that  is,  valuable  goods]  from  the  fact  that  they  are  limited  in 
supply. 


344  VALUE  AND  DISTRIBUTION 

Note  now  that  Dietzel  is  attempting  to  make  labor  a 
valuable  good  in  precise  parallel  with  machinery  or  land, 
and  this  not  in  the  sense  merely  that  effort  must  be  com- 
pensated in  order  to  obtain  product,  and  compensated 
approximately  in  the  measure  that  it  is  attended  by  value 
product,  but  in  the  sense  also  that  labor  has  an  objective 
existence,  as  a  thing  separate  from  the  putting- forth  of  it, 
seemingly  as  a  nof-mon  fact,  like  land  or  appliances. 

But  Boehm-Bawerk  had  put  his  question  in  the  alterna- 
tive, implying  that  the  production  good  must  be  the  cause, 
with  the  value  of  the  product  the  result,  or  vice  versa. 
This  Dietzel  denies :  "The  value  of  the  production  good 
and  the  value  of  the  consumption  good  condition  each 
other  mutually,"  since  no  production  good  has  value  if  its 
product  is  valueless,  and  no  product  has  value  if  its 
production  good  is  valueless. 

A  mine  derives  its  character  as  a  good  from  the  fact  that  it 
can  produce  useful  products ;  it  becomes  a  valuable  good  from  the 
fact  of  its  scarcity.  [Or  is  it  from  the  scarcity  of  its  products?] 
The  product  of  the  mine  derives  its  value  from  the  value  of  the 
mine,  the  mine  its  value  from  the  value  of  the  product.  The 
Johannisberger  vineyard  is  a  good  because  of  its  potential  [?] 
importance  as  the  condition  of  the  satisfaction  of  the  desire  for  a 
particular  wine;  the  vineyard  is  a  valuable  production  good  be- 
cause it  is  a  unique,  or  an  absolutely  scarce,  production  good.  The 
wine  gets  its  value  from  the  value  of  the  vineyard.  If  the  vineyard 
loses  its  value,  as,  for  example,  by  new  methods  of  viticulture,  the 
wine  would,  so  far  as  its  value  were  a  land-cost  value,  become  value- 
less. The  vineyard,  in  turn,  gets  its  value  from  the  value  of  the  wine. 

Dietzel's  objection  to  the  alternative  form  of  the  ques- 
tion would,  however,  better  have  run  not  so  much  that 
either  answer  is  correct  as  that  neither  is  correct.  For 
certain  purposes  and  for  its  particular  point  of  view  either 
way  of  answering  must  indeed  be  admitted  to  be  correct; 
but  the  difficulty  is  that  the  alternative  question  assumes 
that  upon  the  one  side  or  the  other  the  ultimate  causes  are 
to  be  found.  It  is  surely  true  that  an  existing  market  value 
is  the  cause  of  the  entrepreneur  consenting  to  make  his 
cost  outlays ;  and  it  is  equally  true  that  forthwith  the  entre- 
preneur product  affects,  modifies,  and  readjusts  the  market 


CLASSICAL  VERSUS  MODERN  345 

value  of  the  product;  and  it  is  also  true  that  meanwhile 
entrepreneur  coinpetition  is  placing  new  values  on  the 
cost  goods  and  bringing  about  a  new  proportion-adjust- 
ment of  values  with  costs,  or  of  costs  with  values ;  and, 
in  turn,  upon  these  new  costs  are  based  new  entrepreneur 
opportunities,  computations,  and  producings,  and  so  on 
indefinitely  in  a  circle,  the  result  of  each  situation  becoming 
in  its  turn  a  cause  for  the  next  term  in  the  series.  The 
ultimate  causation  must,  then,  be  sought  elsewhere ;  in  the 
sense  of  finality  neither  cost  nor  value  is  cause,  and  any 
attempt  to  fix  upon  either  as  ultimate,  or  even  as  logically 
prior  to  the  other,  must  inevitably  lead  to  circuity  of 
reasoning  or  to  question-begging. 

As  between  cost  and  demand,  Dietzel  admits  and  agrees 
that  the  earlier  fact  in  the  sequence  is  the  demand  with  its 
possible  price ;  mines  could  not  be  scarce  if  people  did  not 
want  iron;  but  then  comes  in  cost  to  put  the  later,  but  the 
decisive,  touches  to  the  situation.  True  it  is  that  what  the 
buyers  will,  at  the  outside,  pay  limits  what  the  producers 
may  spend  in  costs ;  in  this  sense  the  demand  determines 
the  cost ;  but  the  last  determination  and  the  exact  one  is  the 
cost.  The  demand  gives  the  maximum  possible  price;  the 
cost  gives  the  actual  price. 

On  the  question  whether  labor  as  a  productive  fact 
derives  its  value  from  cost  of  production,  Dietzel  says  that, 
as  a  short-time  doctrine,  the  value  of  the  labor  is  explained 
by  the  fact  that  satisfactions  depend  upon  it.  But  in  the 
long  run  wages  cannot  be  lower  than  the  expenses  of 
living  and  of  rearing  a  family;  and  if  higher  than  this,  the 
increase  in  numbers  will  finally  prescribe  the  subsistence 
level  of  wage.  Precisely  how  this  works  itself  out  he 
leaves  to  be  taken  for  granted. 

Boehm-Bawerk  in  rejoinder,  two  years  later,  says,  with 
all  emphasis,  that  the  issue  is  not  at  all  upon  the  validity 
of  the  law  of  costs: 

The  actual  and  essential  features  of  the  cost  law,  viz.,  that  cost 
regulates  the  value  of  reproducible  goods,  that  we  commonly 
appraise  the  goods  directly  according  to  costs,  that  changes  on  the 


346  VALUE  AND  DISTRIBUTION 

side  of  cost  cause  changes  in  the  level  of  value,  these  things  the 
marginal  utility  theorists  have  never  in  the  slightest  overlooked  or 
denied. 

The  issue,  he  says,  is  merely  as  to  whether  this  cost 
law  is  final  or  whether,  on  the  other  hand,  it  rather  does 
not  itself  need  explanation.  And  to  add  the  necessary 
explanation  involves  an  extension  of  theory,  yet  not  an 
extension  of  a  sort  to  cut  across  the  cost  law,  or  to  mutilate 
it,  but  one  which  shall  support  and  strengthen  it. 

This  then  is  the  issue  for  which  we  have  been  waiting. 
Excepting  in  the  entirely  unworkable  sense  of  labor 
pain,  the  classical  school  did  not,  and,  as  has  already 
sufficiently  appeared,  do  not  explain  costs.  And  it  is  also 
sufficiently  evident  that  costs  require  explanation.  It  is  at 
all  events  to  be  set  down  to  the  credit  of  the  later  school 
that  this  problem  is  fully  faced  by  them,  and  a  serious  and 
systematic  attempt  made  toward  its  solution.  That  there 
are  serious  and  obvious  doctrinal  gaps  in  the  Austrian 
analysis  of  demand,  that  the  terminology,  while  more  than 
prodigal,  is  yet  both  illogical  and  insufficient,  are  defects 
not  intrinsically  overserious  of  remedy.  And  in  these 
particular  aspects,  the  newer  position,  with  the  necessary 
modifications,  would  not  be  fundamentally  at  variance  with 
the  Ricardian  doctrine  and  point  of  view.  The  ultimate 
test  must  come  with  the  newer  treatment  of  costs.  In  the 
conviction  of  the  present  writer,  the  Austrian  doctrine,  as 
tried  by  this  test,  makes  not  better  than  a  passable  showing. 

Boehm-Bawerk  continues  :  Doubtless  value  as  cost  may  be 
used  to  explain  value  as  product;  but  how  explain  the  first 
value?  If  value  is  traced  back  far  enough, it  is  almost  certain 
to  come  upon  some  non-reproducible  good,  for  the  value 
of  which  cost  will  not  serve  as  explanation,  or  at  all  events 
to  come  upon  labor.  How  value  this  non-reproducible 
good  or  this  labor?  Shall  we,  with  Dietzel,  value  the  labor 
by  its  production  costs,  by  the  bread  and  meat  necessary  to 
maintain  the  laborer  and  his  family?  But  these  have  them- 
selves already  been  value-explained  in  terms  of  labor. 

The  later  school  resorts  for  the  solution  of  this  diffi- 
culty to  the  doctrine  of  production-related  cost  goods,  the 
doctrine,  namely,  that  the  value  of  a  production  good  in 


CLASSICAL  VERSUS  MODERN  347 

any  particular  employment  is  derived  from  its  value  in 
other  employments,  so  that  the  values  of  similar  goods  are 
equal  as  determined  by  their  values  in  their  marginal  use — 
a  solution  of  the  cost  problem  in  terms  ultimately  of 
utility  rather  than  of  pain : 

And  as  the  value  [subjective  worth]  of  each  similar  sack  of 
corn  is  determined  according  to  the  utility  of  the  sack  dispensed 
with  at  least  sacrifice,  so  the  value  [Wert — subjective?  objective?] 
of  all  production  goods  is  determined  generally  according  to  the 
value  of  the  most  easily  sacrificed  good  v^^hich  will  be  produced  out 
of  the  common  production  store,  or,  as  we  call  it,  according  to  the 
marginal  utility  of  the  marginal  product. 

And  here,  it  is  to  be  remarked,  are  summed  up  all  the 
faults  and  errors  in  the  Austrian  solution ;  for  it  must  be 
that  we  are  talking  of  market  value,  since  it  is  Boehm- 
Bawerk  himself  who  has  elected  to  transfer  the  discussion 
out  of  the  subjective  field:  (i)  With  cost  as  a  competitive 
problem — an  entrepreneur  reckoning — the  value  of  the  pro- 
duction good  in  one  use  is  not  necessarily  dependent  upon 
its  having  an  alternative  industrial  employment.  As  long 
as  there  is  an  alternative  bidder  for  it,  competition  by  other 
entrepreneurs,  it  does  not  at  all  matter  whether  the  good 
has  several  valuable  applications  or  only  one. 

Boehm-Bawerk's  reasoning  mixes  collective  with  com- 
petitive cost  computations,  a  radical  and  all-pervasive  error. 
But  how  as  a  Crusoe  or  a  collectivist  problem?  Even  so, 
the  utility,  the  importance,  the  subjective  value  of  an  agent 
does  not  depend  on  its  having  another  use ;  only  the  cost 
aspect  of  the  agent,  as  a  constituent  of  the  production  cost 
of  the  product,  so  depends;  it  is,  in  such  case,  the  worth  of 
the  one  and  sole  product  that  gives  worth  to  the  agent ; 
agcnt-zvisc,  there  is  no  question  of  cost. 

(2)  It  is  most  difficult  to  make  out  what  J  Vert  stands 
for  in  Boehm-Bawerk's  formulation.  In  the  first  use,  it  is 
almost  of  necessity  the  subjective-value  concept  that  is 
intended.  The  second  use  cannot  bear  the  subjective-value 
meaning,  else,  as  non-relative,  it  would  be  meaningless, 
or  would  be  worse,  as  introducing  all  of  the  rich-man- 
poor-man  perplexities.  It  has  more  the  sound  of  some 
social  marginal  utility,  society  being  conceived  of  as,  for 
the  purpose,  an  individual.     But  this  concept  any  Austrian 


348  VALUE  AND  DISTRIBUTION 

would  be  quick  to  outlaw  as  nonsense.  Nor  logically  and 
justifiably  can  the  concept  be  one  of  marginal  market 
value,  or  any  other  market-value  concept,  since  it  is  market 
value  that  is  sought  to  be  explained.  But  whether  logical 
or  not,  this  last  is  probably  the  correct  interpretation ;  it 
seems,  indeed,  to  be  the  only  possible  interpretation.  And 
so,  assuming  that  there  is  an  alternative  and  marginal  use, 
and  that  this  use  has  a  value  of  its  own,  independently  of 
the  other  and  non-marginal  uses,  the  Austrian  method  will 
trace  the  value  of  the  other  productive  items  back  to  the 
value  of  this  marginal  use.  But  it  will  still  remain  to 
explain  the  value  of  this  marginal  use,  and  to  establish  for 
value  purposes  its  independence  of  the  non-marginal  items 
or  non-marginal  uses.  Must  not  this  marginal-value  use 
be  also  explained  by  appeal  to  some  displacement,  some 
cost? 

But  whether  this  newer  view  is  or  is  not  tenable,  Dietzel, 
as  Boehm-Bawerk  rightly  points  out,  has  himself  adopted 
it.  Dietzel  recognizes  that  the  value  of  the  cost  good  must 
be  explained ;  and  when  he  says,  "The  cabin  that  saves  me 
ten  hours'  labor  is  of  equal  worth  to  me  with  the  products 
which  I  need  and  which  with  this  sum  of  labor  I  purchase 
from  nature,  he  may  be  able  to  see  how  his  explanation 
differs  essentially  from  that  of  the  marginal  utility  the- 
orists; I  [Boehm-Bawerk]  cannot." 

Boehm-Bawerk  insists  that  Dietzel's  explanation,  if  a 
full  one,  must  go  farther  and  explain  the  value  of  the  dis- 
placed fact,  the  cost ;  this  cost  value  must  find  its  explana- 
tion in  marginal  utility : 

The  less  material  and  labor  it  requires  to  make  a  coat,  so  many 
the  more  coats  from  the  same  goods;  so  much  the  lower  down 
the  utility  curve  can  satisfaction  extend,  so  much  the  lower  the 
marginal  utility  of  coats.  By  service  to  marginal  utility  [Groicnut- 
sen]  the  cost  goods  come  to  be  valued.  Not  cost,  but  utility,  then, 
is  at  the  end  of  the  causal  series. 

Here  again  is  some  of  the  talk  that  has  given  rise  to  the 
identification,  through  cost,  of  marginal  utility  with  value. 
Surely  marginal  purchase  price,  wdiether  of  a  consumption 
good  or  of  a  cost  good,  is  capable — all  differentials  aside — 
of  standing  as  the  equivalent  of  price ;  but  it  is  equally 


CLASSICAL  VERSUS  MODERN  349 

clear  that  the  vokuiie  of  supply  items  has  something  to  say 
as  to  how  far  down  upon  the  curve  of  demand  the  mar- 
ginal item  will  be  found.  And  only  one  page  back  mar- 
ginal utility  was  itself  stated  as  a  result  of  the  relation 
between  need  and.  provision  for  need. 

And,  as  Boehm-Bawerk  goes  on  to  say,  not  the  techno- 
logical fact — the  good  or  the  labor  applied — is  final  as 
cost,  but  the  value  of  it;  the  technological  aspect  is  merely 
a  secondary  influence  in  the  case,  as  bearing  upon  the 
quantum  of  the  supply. 

Now  this  is  clearly  entrepreneur  analysis,  and  as  such 
is  correct  in  giving  precedence  to  the  value  aspects  of  the 
production  goods ;  though  it  remains  true  that  it  is  only  as 
based  upon  the  technological  efficiency  of  the  production 
goods,  as  underlying  the  production  of  things  of  value, 
that  these  production  goods  have  any  value.  But  once 
again  let  it  be  said  that  entrepreneur  costs  are  themselves 
not  final  facts  in  value  causation,  but  only  the  method  of 
expression  by  which,  in  an  entrepreneur  economy,  the  final 
facts  attain  manifestation.  The  quantity  of  production 
goods,  as  mere  mechanical  facts — technological  capital — 
has  bearing  upon  the  quantity  of  the  product.  But  quan- 
tity of  product  does  not  directly  determine  value ;  only 
through  supply  in  its  relation  to  demand  does  the  quantum 
of  product  reach  a  value  standing;  thereby  the  production 
goods  obtain,  through  entrepreneur  bidding,  their  value. 
If  there  is  any  one  thing  fundamental  in  all  this,  it  is  not 
the  value  costs,  but  the  volume  of  production  goods.  And 
still  the  volume  of  production  goods  must  in  turn  receive 
an  explanation,  not  only  as  an  aggregate,  but  also  as  a 
share  directed  to  the  service  of  any  particular  line  of 
supply.  The  first  question,  that  of  the  aggregate  supply  of 
production  goods,  goes  back  to  the  original  environmental 
situation,  or  to  an  account  of  the  genesis  of  instrumental 
goods  through  the  intermediary  of  savings  and  capitaliza- 
tion. The  second  problem,  that  of  the  distribution  of  the 
instrumental  goods  between  diflferent  lines  of  production, 
leads  over  into  the  demand  side  of  the  value  equation ; 
given  at  any  time  the  aggregate  supply  of  dififerent  com- 
modities, how  are  these  adjusted  to  one  another  in 
exchange  relations — market  values?  and  how,  in  view  of 
their  existing  volumes,  do  production  goods,  through  entre- 


3SO  VALUE  AND  DISTRIBUTION 

preneur  bidding,  receive  their  market  values,  get  dis- 
tributed among  the  different  industries,  modify  the  value 
levels  for  products,  and  thereupon  get  revalued  and 
redistributed  ? 

But,  while  Boehm-Bawerk  regards  the  old  school  and 
the  new  as  at  issue  upon  the  nature  of  costs,  he  finds 
Dietzel  to  be  after  all  in  essential  agreement  with  the  later 
doctrine ;  as  against  Dietzel  the  issue  is  solely  as  to  which 
of  the  two  influences,  cost  and  marginal  utility,  is  cause 
and  which  effect.  Dietzel's  position  is  that  both  are  cause 
and  both  eft'ect,  in  some  final  and  ultimate  sense.  Upon 
this  issue  Boehm-Bawerk's  argument  is  clear  and  con- 
vincing to  the  point  of  brilliancy  :  Material  causation  is 
easily  misunderstood  and  misapplied ;  a  tree  may  be  the 
cause  of  an  acorn,  and  the  acorn  in  turn  the  cause  of  a 
tree,  but  not  of  the  same  tree ;  poverty  may  cause  drunken- 
ness, and  this  in  turn  cause  poverty,  but  not  the  same 
poverty.  Concretely  the  same  things,  the  same  objective 
facts,  cannot  be  both  cause  and  eft'ect.  Dietzel's  position 
is  a  logical  impossibility. 

Note  here,  however,  that  the  question  is  so  far  only 
whether  utility — or  marginal  utility,  or  subjective  worth — 
is  or  is  not  the  cause  of  cost;  and  surely  on  this  point  there 
can  be  no  doubt  as  to  which  category  in  economic  produc- 
tion is  primary — demand  or  supply.  But  upon  the  further 
question  whether,  as  an  o  it  re  preneur  fact,  cost  causes 
value,  or  value  cost,  it  is  not  so  clear  which  is  right,  or  that 
either  is  right ;  neither  costs  of  production  nor  values  of 
products  are  to  be  accepted  as  ultimate  causes ;  rather  both 
are  to  be  regarded  as  effects  of  desires  for  products,  as 
over  against  human  productive  powers  in  conjunction  with 
the  environmental  equipment  of  productive  opportunity  and 
productive  instruments.  The  causal  sequence  runs,  human 
desires  and  needs  being  taken  for  granted,  from  produc- 
tion goods  and  human  productive  powers,  more  or  less 
scarce  or  abundant  relatively  to  the  needs,  to  the  more  or 
less  of  products  relatively  to  the  needs,  thence  to  the  rela- 
tive exchange  powers  of  products,  thence  to  the  relative 
exchange  powers  of  the  productive  agents  and  instruments. 
On  the  supply  side,  the  primary  term  of  the  causal  series  is 


CLASSICAL  VERSUS  MODERN  35^ 

the  instrumental  goods  and  powers — but  not  these  goods 
and  powers  in  their  value  aspect. 

But  evidentl}'  all  of  this  reasoning  is  upon  a  level  of 
value  analysis  deeper  than  the  entrepreneur  categories  and 
underlying  these  categories, — a  stratum  of  thought  to  which 
the  cost  category  is  irrelevant,  otherwise  than  as  mere 
expression  or  inanifestation  of  the  underlying  facts  which, 
under  the  competitive  management  and  bidding  of  entre- 
preneurs, are  making  themselves  effective  through  the 
leveling  and  proportioning  mechanism  of  entrepreneur 
costs.  The  entrepreneur,  however,  is  prone  to  accept  the 
values  of  the  cost  facts  as  opaque  and  ultimate  causal  data 
determining  the  values  of  products  by  determining  the 
supplies  of  them. 

But  Boehm-Bawerk  is  right  in  insisting  that  the  value 
aspect  attaches  to  the  production  goods  only  by  way  of 
derivation  from  the  value  of  the  product.  But  it  is  equally 
true  that  the  limitation  of  supply,  whereby  value  arises,  is 
upon  the  products  only  as  a  derivative  from  the  limited 
supply  of  agents.  And,  in  fact,  Boehm-Bawerk  says  as 
much ;  his  argument  for  his  aspect  of  the  truth  runs  as 
follows :  Priority  of  time  is  not  the  point ;  there  is  no 
summer  till  after  the  spring,  but  the  spring  does  not  cause 
the  summer.  The  value  of  the  product  is  explained  by  the 
fact  that  the  production  goods  are  not  in  superfluity;  put 
with  this  the  demand,  and  value  comes  both  for  products 
and  for  cost  goods, — that  is,  the  product  has  value  by  virtue 
ultimately  of  the  same  cause  that  gives  value  to  the  pro- 
ductive good.  None  the  less  the  value  of  the  product  is 
farthest  back  in  the  chain  of  causation;  the  production 
good  gets  its  value  from  the  value  of  the  product.  So  corn 
is  not  high  because  rent  is  paid,  but  rent  is  paid  because 
corn  is  high.  If  the  art  of  smelting  ore  were  lost,  iron  ore 
would  become  valueless,  but  not  iron ;  while  to  forget  the 
methods  of  using  iron  would  render  both  iron  and  iron  ore 
valueless.  So  a  corner  in  brick  will  carry  up  the  prices  of 
brick,  together  with  the  quotations  upon  stocks  in  brick 
corporations ;  but  prices  of  brick  cannot  be  raised  through 


352  VALUE  AND  DISTRIBUTION 

an  advance  in  the  market  quotations  upon  brick  stocks, 
etc. — all  excellent,  if  only  it  all  mattered,  if,  in  truth,  the 
causation  were  finally  with  the  value  of  the  produced  good. 
But  it  is,  at  any  rate,  clear  that  it  is  not  finally  with  the 
costs  of  the  produced  good. 


CHAPTER  XIX 

THE  POSITIVE  THEORY  AND  NATURAL  VALUE 

It  is  not  surprising  that  in  the  Positive  Theory  a  goodly 
part  of  Boehm-Bawerk's  discussion  of  market-vaUie  costs 
is  found  within  the  chapters  upon  "Subjective  Vakie."  ^ 
That  between  subjective  cost,  market-vakie  cost,  collectiv- 
ist  cost,  and  entrepreneur  cost,  there  is  a  shifting  so 
continuous  that  one  is  rarely  sure  of  precisely  what  is 
being  discussed,  must  fairly  be  accorded  this  much  of  justi- 
fication, that  Boehm-Bawerk  himself  does  not  recognize 
the  importance  of  the  distinctions.  But  the  distinctions  are 
none  the  less  important,  and  it  is  for  the  most  part  in  the 
failure  duly  to  recognize  them  that  the  Austrian  view  of 
cost  falls  so  far  short  of  consistency  and  adequacy. 

The  later  theory,  Boehm-Bawerk  says,  explains  value 
by  "the  marginal  utility  which  a  good  is  capable  of  render- 
ing; that  is -to  say,  it  depends  on  its  future  employment,'"^ 
and  not  on  the  value  of  the  production  goods  consumed  in 
producing  it,  not  on  the  conditions  of  its  origin ;  the  deter- 
mination is  forward-looking. 

Lest  this  be  understood  as  denying  the  influence  of 
costs,  let  it  be  kept  in  mind  that  the  discussion  here  is  of 
subjective  worth,  and  that  marginal  utility  for  this  purpose 
has  itself  already  been  made  a  matter  of  costs,  but  all  the 
while  forward-looking, — a  question,  that  is,  of  what  sacrifice 
of  other  values,  or  sometimes,  doubtless,  of  effort,  will 
result. 

And  it  may  again  profitably  be  said  that  any  form  of 
value  must  run  in  terms  of  some  condition  or  sacrifice 
imposed  upon  the  having  or  the  keeping.  The  criticism 
urged  is  merely  that  the  cost  of  the  marginal  utility,  the 
value  of  it,  should,  as  a  concept,  be  kept  rigorously  distinct 
from  the  marginal  utility  itself.  And,  after  all  is  said,  it 
remains  true  also  that  the  very  concept  of  marginal  utility 
itself  is  a  cost  concept.     That  the  esteem,  the  significance, 

^  Positive   Theory,   Book   III. 
^  Positive  Theory,  p.   1 79. 

353 


354  VALUE  AND  DISTRIBUTION 

the  emphasis,  but  not  the  utiHty,  accorded  to  each  item  in 
the  whole  stock  is  reduced  to  the  level  of  the  marginal  item, 
is,  in  last  analysis,  as  much  a  doctrine  of  cost,  of  substitu- 
tion, as  the  method  by  which  the  subjective  worth  of  the 
marginal  utility  is  found  to  be  determined  by  that  last  and 
least-cherished  item  of  some  other  series.  But  the  last 
item  in  any  one  stock  cannot,  as  the  cost  of  any  other  item, 
be  offered  as  basis  or  measure  of  value,  because,  as  merely 
exchanging  against  duplicates  of  itself,  no  light  is  thrown 
upon  the  question  of  its  exchange  power. 

But  Boehm-Bawerk '^  shows  that  the  value  [subjective?] 
of  a  production  good — by  the  very  fact  that  it  is  not  a  con- 
sumption good  and  can  therefore  have,  in  its  own  right  and 
ultimately,  no  utility — is  not  derived  from  its  own  marginal 
utility,  but  only  from  the  marginal  utility  of  the  product. 
"The  value  must  be  high  when  the  dependent  satisfaction 
is  important,  and  low  when  it  is  unimportant."  * 

This  seems  to  be  a  subjective  value  formulation,  and, 
as  such,  needs,  perhaps,  no  criticism  for  lack  of  relativity; 
but  surely  as  a  market-value  formulation  the  doctrine 
would  require  restatement  to  read :  "The  value  will  be 
high  when  the  dependent  satisfaction  is  relatively  impor- 
tant, etc." 

But  here  the  difficulty  again  presents  itself  that,  in  close 
analysis,  the  subjective  worth  of  a  production  good,  like 
that  of  a  consumption  good,  is  determined  not  by  the 
dependent  utility  itself  but  rather  by  the  cost  aspect  of  the 
dependent  utility ;  which  cost  may  as  well  be  found  in  the 
mere  labor  cost  of  the  production  good  as  in  the  displace- 
ment of  some  potential  product:  for,  according  to  the  Aus- 
trian view,  the  utility  of  the  marginal  good  may  not,  after 
all,  be  determined  by  its  own  utility  but  by  its  displacement 
of  other  utilities,  or  possibly  by  its  own  labor  cost.  The 
cost  principle,  as  here  invoked  to  arrive  at  the  subjective 
value  of  the  consumption  good,  implies  that  the  subjective 
value  of  any  production  good  must  be  found,  not  in  the 
marginal  utility  of  its  product,  but  in  the  subjective  value 
of  its  marginal  product;  not,  that  is  to  say,  in  its  marginal- 
utility  productiveness,  but  in  the  marginal  cost  of  this  pro- 
ductiveness. 

*  Positive   Theory.  *  Ibid.,  p.  1 80. 


POSITIVE  THEORY  AND  NATURAL  VALUE       355 

But,  in  point  of  fact,  it  is  not  possible  even  here  to  be 
sure  that  the  discussion  is  in  the  subjective-value  field;  for, 
in  confirmation  of  the  argument,  appeal  is  made  to  market- 
value  phenomena,  and  to  that  very  "law  of  costs 

Experience  shows  that  the  value  of  most  goods  is  equal  to 
their  'costs.'  But  costs  are  nothing  else  than  the  complex 
of  those  productive  goods  which  have  value  ....  [and] 
must  be  expended  in  the  making  of  the  products."  ^ 

Suppose  that  one  has  three  similar  production  goods, 
any  one  of  which  will  suffice  for  the  production  of  con- 
sumption good  A,  B,  or  C,  the  A  product  having  a  mar- 
ginal significance  of  lOO,  B  of  120,  C  of  200; 
the  production  good  must  have  a  value  of  100 :  "The  value 
of  the  productive  unit  adjusts  itself  to  the  marginal  utility 
and  value  of  that  product  which  possesses  the  least 
marginal  utility  among  all  the  products  for  whose  produc- 
tion the  unit  might,  economically,  have  been  employed."  "^ 

"The  JVcrt  of  goods  which  have  a  higher  individual 
marginal  utility  is  put  on  a  level  with  the  value  of  the  'mar- 
ginal product' — as  we  shall  call  that  product  which  has  the 
least  marginal  utility."  ^ 

Here  we  note  that  marginal  utility  and  Wert  are  pre- 
sented as  not  necessarily  equal ;  the  IVcrt  of  the  non-mar- 
ginal product  is  made  equal  to  the  Wert  of  the  marginal 
product,  since  the  production  goods — deriving  their  value 
from  the  marginal  application — dictate  as  costs  their  lower 
value  to  products  possessing  higher  marginal  utility  but 
requiring  only  equal  costs. 

We  seem  here  to  be  in  the  field  of  subjective  worth — 
though  all  the  while  this  is  not  to  be  certainly  asserted. 
But,  at  any  rate,  why  is  the  100  use  marginal?  that  is,  why 
are  there  only  three  production  goods?  Probably  because 
other  productive  openings  have  left  no  larger  provision  of 
agents  for  the  three  wants  in  question.  Even  on  the  indi- 
vidual basis,  then,  there  is  something  relational  here,  and 
something  backward-looking. 

Boehm-Bawerk's  doctrine  that  value  is  the  sum  of  mar- 

°  Boehm-Bawerk,  op.  cit.,  p.  183. 

''Ibid.,  p.   186.  'Ibid.,  p.  181. 


356  VALUE  AND  DISTRIBUTION 

ginal  costs,  each  of  these  costs  getting  its  vahie  from  its 
least  valuable  use,  would  be  true,  so  far  as  it  goes,  if  only 
these  marginal  costs  were  fully  analyzed  into  an  indiffer- 
ence between  marginal  uses.  But  here  a  distinction  must 
be  drawn  between  isolated  or  collectivist  production  as 
against  competitive  production.  The  displacement,  as 
opportunity  idea,  applies  to  competitive  production  only 
through  the  individual  computation.  The  entrepreneur  is 
as  readily  marginal  through  his  outlay  for  the  cranberry 
patch  as  for  some  productive  good  having  an  alternative 
application.  To  the  entrepreneur  there  is  the  clearly 
defined  alternative  by  virtue  of  which  he  becomes  marginal, 
viz.,  whether  or  not  to  apply  his  capital  power  to  the  hire 
of  the  cranberry  patch.  And  in  point  of  fact  also,  the  cran- 
berry patch  has  alternative  applications,  in  the  sense  that  it 
has  different  and  competing  relations  of  adaptation  and  of 
desirability  to  different  men ;  the  successful  bidder  has  not 
necessarily  to  bid  his  maximum,  but  only  to  outbid  his 
most  willing  competitor.  It  is  thereby  rare  that,  in 
market-value  problems,  the  producer  nearest  to  the  margin 
is  really  upon  the  margin, — rare,  that  is,  that  cost  ever  quite 
equals  value.  That  the  case  is  not  precisely  the  same  with 
Crusoe,  or  in  collectivist  production,  is  due  to  the  fact  that 
in  the  isolated  economy,  cost  resolves  itself  mostly  or 
entirely  into  the  alternative-want  aspects  of  production, 
into  the  resistance  pull  of  other  demands.  That  Boehm- 
Bawerk,  despite  the  fact  that  he  is  citing  and  discussing 
a  market-value  doctrine,  is  proceeding  upon  the  group  con- 
cept of  cost,  instead  of  upon  the  competitive  concept,  is 
shown  in  the  following: 

If  we  are  considering  what  a  good  ....  of  higher  immedi- 
ate marginal  utility  is  worth  for  us,  we  must  say  first  of  all,  it  is 
worth  exactly  as  much  as  the  means  of  production  from  which  we 
could  reproduce  it  at  any  moment.  Then  if  we  examine  further 
how  much  the  means  of  production  themselves  are  worth,  we  come 
to  the  utility  of  the  marginal  product.^ 

It  is,  indeed,  passing  odd  that  the  principle  of  displace- 
ment is  applied  here  but  is  not  accurately  applied  to  competi- 
tive costs ;  but  in  competitive  cost  the  principle  is  more 
difficult  to  apply,  as  complicated  with  questions  of  individual 
capacity  and  preference.  In  competitive  production  the 
costs  are  fixed,  in  part  by  the  market  prices  of  production 

*  Boehni-Bawerk,  op.  cit.,  p.   i88. 


POSITIVE  THEORY  AND  NATURAL  VALUE       357 

goods,  and  in  part  also  by  the  alternative  openings  offered 
for  the  personal  activity  of  the  entrepreneur ;  he  is  not,  in 
any  ordinary  case,  appreciably  an  influence  to  affect  the 
conditions.  Yet  in  his  small  share,  whether  he  be  a  mar- 
ginal producer  or  not,  he  does  have  an  effect.  Labor,  or 
land,  or  capital  uses,  acquire  their  market  value  as  produc- 
tive agents  through  the  competitions  of  producers  bidding 
for  the  help  of  these  agents.  The  value  is  not  the  mar- 
ginal-value contribution  of  the  agent,  but  is  the  price 
adjustment  at  the  level  of  the  marginal  bid, — not  the  possible 
but  the  actual  bid  in  view  of  the  actual  value  contribution, 
or, — put  more  accurately  so  as  to  cover  the  interest- 
discount  modification, — it  is  the  price  set  at  the  marginal 
bid  in  view  of  the  present  worth  of  the  expected  future 
value  contribution.  But  the  competition  of  producers  is 
ordinarily  not  drawn  from  one  field  of  production  alone ; 
the  quantity  of  agents  at  the  service  of  one  line  of  produc- 
tion is  commonly,  though  not  always,  mostly  a  question  of 
the  alternative  pull  of  entrepreneurs  in  other  industries. 

Cost,  from  the  individual  point  of  view,  is  therefore  truly 
a  question  of  displacement,  but  sometimes  of  displacement 
of  agents  from  one  productive  use  to  another,  sometimes 
of  agents  from  other  competing  hands  to  the  producer's 
hands.  The  higher  of  the  two  amounts  functions 
as  the  cost  quantum.  So,  for  example,  if  land  costing  the 
tenant  lOO  rent  may  be  made  to  render  him  103  of  service 
in  corn  or  105  in  wheat,  the  land  cost  of  the  wheat  is  not 
100  but  103.  That  is  to  say :  The  cost  of  the  agent  under 
consideration  will  be  expressed  either  as  the  money  sig- 
nificance of  the  agent  in  some  alternative  employment  under 
the  management  of  the  holder,  or  as  the  money  outlay 
imposed  by  the  bidding  of  competing  entrepreneurs ;  and 
the  true  cost  will  be  the  larger  of  these  two  value  quanti- 
ties. Thus,  while  we  may  acquiesce  in  Boehm-Bawerk's 
statement,  "that  even  when  the  law  of  costs  holds,  costs  are 
not  the  final  but  only  the  intermediate  cause  of  value,"  this 
acquiescence  must  import  a  meaning  different  from  that 
intended  by  Boehm-Bawerk ;  it  cannot  be  admitted  that 
demand  has  anything  more  to  do  with  value  tJian  has  cost, 
unless  in  the  ultimate  sense  that  all  economic  activity  traces 
back  to  want,  and  that  even  competitive  costs  are  more 
commonly  than  otherwise  the  expression  of  alternative 
demands.     And   we   must   dissent   unqualifiedly    from   the 


358  VALUE  AND  DISTRIBUTION 

general  proposition  that  "it  is  only  this  many-sided  char- 
acter of  most  cost  goods,  their  capacity  for  being  employed 
in  many  different  uses,  that  gives  the  appearance  of  the 
contrary."  ^  This  statement  is  uniformly  true  only  of  the 
isolated  or  socialized  economy.  But  doubtless  it  is  some- 
times true  of  competitive  production ;  that  is,  it  may,  as  we 
have  already  seen,  be  the  case  that  in  any  particular  entre- 
preneur's hands  an  agent  be  on  the  point  of  being  turned 
by  him  into  another  line  of  production ;  against  the  use  that 
he  is  making  of  an  agent,  the  highest  bid  is  not  that  of 
some  competitor  but  is  his  own  bid  for  use  in  another  line 
of  product. 

In  Wieser's  treatment  of  costs  and  of  value,  the  dis- 
cussion chiefly  concerns  that  which  he  terms  "Natural 
Value," — collectivist  value — value  arising  "from  the  social 
relation  between  amount  of  goods  and  utility,  or  value  as  it 
would  exist  in  the  communist  state."  " 

That  this  manner  of  approach  is  for  many  purposes 
most  serviceable  is  not  to  be  denied ;  but  to  be  a  working 
concept,  it  must  assume  that  in  administration  all  indi- 
viduals are  regarded  not  merely  as  entitled  to  equal  con- 
sideration, but  as  precisely  similar  in  all  relevant  aspects ; 
or,  if  the  discussion  is  to  throw  light  upon  exchange-value 
problems,  that  an  equal  quantum  of  purchasing  power 
is  assigned  to  the  different  claimants  under  the  collectivist 
distribution. 

Wieser  points  out  that,  under  present  conditions,  goods 
are  not  distributed  according  to  their  maximum  service  in 
consumption,  but  according  to  strength  of  purchasing 
power;  exchange  value  estimates  luxuries  high  and  neces- 
saries low ;  error,  fraud,  force,  private  property,  and  social 
inequality  disturb  the  case:  "In  natural  valrj  goods  are 
estimated  simply  according  to  their  marginal  utilitv ;  in 
exchange  value,  according  to  a  combination  of  marginal 
utility  and  purchasing  power."  ^^ 

"  Boehm-Bawerk,  o[^.  cit.,  p.  189. 
"  Wieser,  Natural  Value,  p.  60. 
^'Ibid.,  p.  61. 


POSITIVE  THEORY  AND  NATURAL  VALUE       359 

In  a  certain  sense,  truly,  all  prices  are  costs,  as  terms  of 
sacrifice  upon  which  all  goods  are  obtained.  But  an 
entirely  intelligible  and  analyzable  value  situation  might 
obtain  under  conditions  in  which  cost  of  production  could 
have  no  part,  as,  for  example,  under  the  government 
supply-distribution  system  at  an  Indian  agency.  So  Wieser 
rightly  remarks  that  the  elementary  theory  of  value  con- 
siders "that  goods  come  into  men's  disposal  without  requir- 
ing to  be  first  produced,"  ^^  but,  as  one  infers,  with  equality 
of  purchasing  power  somehow  established  in  the  society, 
or  with  some  assumed  preliminary  and  temporary  distri- 
bution of  the  consumption  goods.  In  such  conditions,  land 
and  capital  could  have  no  value.  But  "if  we  do  away  with 
this  assumption  [of  non-production] ,  we  obtain  the  natural 
laws  of  value  in  production."  ^^ 

So,  under  socialism,  Wieser  says : 

There  must  be   land  rent    [land  differentials] In   such   a 

state  it  would  not  form  personal  property,  but  it  would  be  calcu- 
lated separately  in  the  total  income  of  the  community,  and  that  on 
essential  grounds,  namely,  in  order  to  find  out  what  is  the  quota 
which  individual  lands  contribute  to  total  return,  and  to  judge 
therefrom  what  outlay  may  and  ought  to  be  expended  to  obtain  this 
quota.  In  other  words,  the  economic-technical  service,  that  of 
controlling  production,  would  remain,  while  the  personal  part  it 
plays,  as  a  source  of  private  income,  would  fall  away." 

Now,  not  at  all  denying  the  service,  both  expositional 
and  doctrinal,  of  this  point  of  view,  it  is  perhaps  the  more 
to  be  regretted  that  so  often  there  slip  in  competitive  con- 
cepts and  illustrations,  rarely  clearly  distinguished,  and 
that  the  point  of  view  appears  to  be  in  perpetual  flux 
between  collectivism  and  competition.  In  truth,  here,  as 
with  Boehm-Bawerk,  the  reader  finds  that  the  difficulties  of 
distinguishing  between  subjective-  and  objective-value  doc- 
trines are  extreme. 

Seemingly  upon  considerations  both  of  expositional 
advantage  and  of  logical  priority,  Wieser  takes  up  the 
problem  of  distribution  as  fundamental  to  the  doctrine  of 
costs, — which,  perhaps,  is  as  well  as  the  other  way  about, 
since  either  method  must  tacitly  involve  one  or  the  other  of 
two  assumptions ;  either  that  value  and  distribution  are  dis- 

^-Ibid.,  p.  61.  ^Ubid.,  p.  61.  ^^Ibid.,  p.  63. 


o 


60  VALUE  AND  DISTRIBUTION 


tinct  problems,  or  that  one  solution  may  be  made  derivative 
from  the  other.  "The  consideration  that,  from  production 
goods,  one  can  obtain  a  return  in  goods  which  possess 
not  only  utility  but  value,  gives  production  goods  their 
value."  ^^  "But,"  as  Wieser  rightly  says,  "the  proposition 
that  production  goods  obtain  their  value  from  the  value  of 
their  returns,  suffices  for  the  co-operation  of  the  co-operat- 
ing productive  factors  as  a  whole,  not  for  their  valuation 
individually."  Thus  value  must  explain  costs  as  an  aggre- 
gate, but  until  we  find  the  principle  of  imputation,  "the 
valuation  of  production  goods  [separately]  will  remain  an 
enigma."  ^^ 

Nor  is  it  possible,  as  Menger  thought,  to  arrive  at  the 
contribution  of  any  one  item  by  assuming  its  loss.  Three 
goods.  A,  B,  and  C,  co-operating  together  may  give  a  value 
of  10,  while  any  two  of  them  together  or  applied  in  other 
combinations  would  give  a  value  of  only  6.  By  Menger's 
reasoning  this  would  assign  to  each  a  value  of  4.  But  3 
times  4  is  more  than  the  value  of  all  working  together. 
The  advantage  which  a  good  renders  is,  therefore,  not  to 
be  calculated  by  the  loss  which  will  come  with  its  loss,  but 
by  the  gain  which  does  come  with  its  possession.^^  The 
actual  employment  is  the  one  from  which  computation 
should  be  made,  and  not  the  employment  which  might  have 
been  resorted  to,  if  something  not  as  good  as  was  done  had 
had  to  be  done.  The  three  factors  in  combination  produce 
a  surplus  of  i  over  what  they  could  produce  separately  or 
in  any  other  combination ;  it  was  because  of  this  surplus 
that  they  were  put  together;  to  the  extent  of  this  surplus 
there  is  something  to  be  divided  which  the  method  of  sub- 
traction cannot  distribute. 

But  will  this  specific  productivity  solution  serve  better? 
The  truth  is  that  men  bid  for  instruments  of  production  to 
go  with  their  own  labor  or  to  supplement  an  existing  stock, 
because,  with  the  new  factors,  the  old  become  more  pro- 

"  Wieser,  op.  cit.,  p.  70.  "  Ibid.,  pp.  72,  78.         "  Ibid.,  p.  85. 


POSITIVE  THEORY  AND  NATURAL  VALUE       361 

ductive ;  but  there  is  no  occasion  for  ascribing  the  total  of 
this  joint  and  co-operative  increase  either  to  the  old  or  to 
the  new  factors.  Market  values  for  productive  contribu- 
tions can,  indeed,  be  worked  out  of  situations  of  this  sort — 
the  market  is  doing  it  daily  and  hourly — but  never  any 
measure  or  purported  expression  of  the  value  productive- 
ness. 

To  a  hunter,  rifle  and  cartridge  together  may  have  a 
great  I  Vert;  as  a  necessary  fact  in  the  combination,  either 
may  be  said  to  have  all  the  worth ;  alone  neither  would  have 
any  of  it.  And  likewise,  if  there  is  only  one  artist  who  can 
do  a  given  thing,  and  only  one  item  of  material  on  which  or 
with  which  the  thing  can  be  done,  there  is  no  theoretical  way 
of  dividing  the  finished  product.  But  if  either  factor  can 
be  replaced,  the  deadlock  is  broken;  and  if  there  are  differ- 
ent combinations  enough  into  which  the  different  produc- 
tion goods  are  entering,  the  market  will  solve,  from  all  the 
different  equations,  the  values  of  the  different  unknown 
quantities :  so,  from 

A'-|-3'=ioo 
2A' 4-3^=290 

43'+5-=590 
it  may  be  deduced  that  .i'=40,  y=6o,  and  s=yo.     "The 
sum  of  all  the  productive  contributions  exactly  exhausts  the 
value  of  the  total  return."  ^^ 

But — it  is  to  be  objected — the  entrepreneur  must  all  the 
while  be  here  as  a  fourth  fact,  and  the  adjustment  of 
market  value  must  take  place  through  entrepreneur  bid- 
ding. There  are,  then,  accurately  no  such  equations  as 
,r-[-3'=ioo,  etc. ;  the  sum  must  be  a  different  one  with  each 
different  entrepreneur,  since  each  of  all  tlie  different  goods 
must  hold  a  different  productive  relation  to  each  different 
entrepreneur.  The  outcome  will  be  one  ascribing  to  the 
instrument  or  agent  as  remuneration  the  sum  expressing 
merely  the  highest  entrepreneur  bid  for  it  by  virtue  of  its 
productivity  relation  to  this  particular  entrepreneur, — that 
is  to  say,  the  highest  value  offer. 

^^Ibid.,  p.  88. 


362  VALUE' AND  DISTRIBUTION 

But  it  is  at  any  rate  true,  as  Wieser  rightly  insists,  that 
the  value  of  each  productive  good  is  in  part  conditioned 
on  the  existence  of  goods  capable  of  co-operating  with  it, — 
on  complementary  goods.  Land  has  greater  value  as  capi- 
tal goods  increase;  labor  greater  value  as  the  land  is 
better. 

According  to  Menger  ....  the  farmer  who  loses  his  cart 
horse,  loses  only  the  value  of  the  animal,  whereas  ....  he 
suffers,  beyond  this,  some  disturbance  in  the  value  of  his  remaining 
productive  wealth." 

Every  productive  good  ....  has  ascribed  to  it  a  greater 
effect  than  it  could  obtain  through  its  own  powers;  ....  on  the 
other  hand,  ....  a  lesser  effect  ....  than  might  be  expected 
from  the  degree  of  dependence  in  which  the  complementary  goods 

stand  to  it The  imputation  assigns  in  this  way  a  medium 

share Of   land,   capital,  and  labor  there  is  nothing  to  be 

said  except  that,  together,  they  bring  forth  everything;  alone, 
nothing."" 

But  note  here  that  just  how  or  why  the  outcome  is  as  it 
is,  cannot  be  made  clear  without  the  assumption  of  the 
entrepreneur  fact,  with  all  the  diiTerences  in  entrepreneur 
capacity,  in  capital  equipment,  and  in  personal  preference. 
Wanting  this  aspect,  and  full  allowance  for  it,  we  have  only 
a  mystery. 

Noting  also  that  the  foregoing  passage  seems  to  appeal 
to  the  actual  market,  and  that  a  part  of  it  so  appeals  in 
terms,  so  that  we  are  left  in  our  chronic  doubt  as  to 
whether  and  how  far  we  are  in  the  "natural-value"  reckon- 
ing, the  further  development  of  the  argument  becomes  of 
interest.  The  marginal  law  for  production  goods  is  asserted 
to  follow  that  for  consumption  goods ; 

In  every  stock  of  consumption  goods,  every  unit  receives  its 
value  from  the  marginal  utility ;  thus  the  value  which  the  products 
are  expected  to  have  is  already  adjusted  to  the  marginal  level, 
and  the  value  of  the  production  goods,  as  derived  from  this,  is 
consequently  placed,  from  the  beginning,  on  the  basis  of  the 
marginal  value."^ 

But  production  goods  may  be  used  to  create  products 

'"Wieser,  op.  cit.,  p.  91.  '^  Ibid.,   pp.   92-94.  ^^  Ibid.,   p.   97. 


POSITIVE  THEORY  AND  NATURAL  VALUE       363 

of  different  kinds.  "In  each  kind,  taken  by  itself,  the 
value  of  the  product  is  adjusted  to  the  level  of  its  particular 
marginal  utility."  ^-  And  since  these  margins  of  utility  in 
the  different  kinds  of  goods  are  rarely,  if  ever,  precisely 
equal,  "production  stocks  must  always  be  employed  in  such 
a  way  as  to  bring  forward  those  products  which  will  secure 
the  greatest  possible  satisfaction  of  want."  And  goods 
not  all  having  the  same  marginal  utility, — gold  for  the  filling 
of  teeth  and  gold  for  gilding  not  fully  corresponding  in 
utility, — "it  is  quite  impossible  in  the  two  kinds  of  employ- 
ment to  keep  always  exactly  to  the  same  marginal  amount ;" 
it  is  sufficient  if  no  rearrangement  will  bring  a  higher 
utility." 

Here  again,  not  attempting  to  be  quite  certain  whether 
the  discussion  is  wholly  collectivist  in  reference,  though 
most  of  it  surely  is,  and  merely  remarking  these  further 
cases  of  mix-up  between  marginal  utility  and  value,  or 
Wert,  we  are  especially  interested  to  observe  that  the  differ- 
ence in  the  utility  of  gold  for  teeth  as  against  any  other 
employment  does  not  appear,  in  Wieser's  thought,  to 
depend  upon  differences  in  buyers'  purchasing  power,  but 
solely  upon  the  fact  that  the  marginal  need  with  reference 
to  teeth  may  be  much  greater  than  any  other  need,  even  the 
highest,  for  gold  for  other  purposes ;  but  the  value  will 
correspond  to  the  cost — to  the  displacement — in  these  minor 
uses.  This,  then,  definitely  asserts  that  value  is  often  less 
than  marginal  utility,  and  so  is  one  more  recognition  that 
marginal  utility  and  value  are  distinct  concepts,  and  are 
quantities  not  interchangeable,  and  that  value  is  the  cost 
aspect  of  utility. 

But  now  recurring  to  the  doctrine  that  "land,  capital, 
and  labor  together  bring  forth  everything,  alone  nothing," 
and  that  "the  sum  of  the  productive  contributions  exhausts 
the  whole  return,"  these  statements,  if  accepted  as  true, 
must,  as  we  have  seen,  be  interpreted  to  include  the  entre- 
preneur as  laborer,  as  co-operating  factor  of  production, 
and  also  as  the  director  in  the  distribution  of  product.  Of 
land,  capital,  and  labor,  as  compensated  under  rent,  inter- 

^  Ibid.,  p.   97. 

*'  Ibid.,  p.  98,  passim. 


364  VALUE  AND  DISTRIBUTION 

est,  and  wages,  and  with  no  account  made  of  profits,  the 
proposition  does  not  hold.  And  when  we  are  asked  to 
"suppose  these  productive  elements  employed  on  the  most 
rational  plan  possible,"  we  seem  to  be  assuming  that  all  the 
employed  agents  are  precisely  alike  relatively  to  entrepre- 
neurs in  general,  or  that  all  are  upon  the  market-value  basis 
fully  interchangeable,  and  that  all  entrepreneurs  are  pre- 
cisely alike  in  all  relevant  aspects, — no  part  of  which  is  in 
any  wise  permissible  of  assumption.  For  competitive  pro- 
duction at  least,  these  three  productive  agents  must  be  taken 
as  somehow  including  the  employer,  the  valuer  and  bidder 
fact,  or  must  assume  as  somehow  in  the  background  a 
fourth  productive  element,  the  human  director;  and  he  is 
always  a  different  man.  There  is,  then,  ng.  such  thing  as 
one  most  rational  plan  or  combination  of  productive 
factors,  unless  this  presupposes  a  one  best  entrepreneur. 
And  in  fact,  under  equally  skilful  but  different  entrepre- 
neurs, different  combinations  of  productive  factors  must  be 
the  best  combinations.  There  is,  therefore,  for  any  particu- 
lar production  good,  no  such  thing  possible  as  one  specific 
marginal  use  or  marginal  service  or  marginal  utility  or 
marginal  productivity,  as  attributable  to  it  in  its  own  right 
and  independently,  or  even  as  dependent  solely  on  the  rela- 
tion of  the  agent  in  question  to  some  other  production  good 
or  goods,  but  only  as  also  related  to  the  situation  and  apti- 
tudes and  needs  of  a  specific  entrepreneur.  There  must, 
then,  be  as  many  specific  marginal  productivenesses  as  there 
are  different  entrepreneurs  to  come  into  relation  with  the 
good  in  question.  The  fallacy  of  the  "marginal  contribu- 
tion" of  any  particular  productive  good  is  parallel  to  that  of 
the  marginal  utility  of  consumption  goods  upon  the  market; 
in  neither  case  is  there  room  for  more  than  a  marginal  rela- 
tivity. For  market-value  purposes,  the  marginal  productive 
contribution  does  not  exist,  but  only  the  market  value  of 
the  contribution,  as  the  outcome  of  competitive  bidding, 
based  upon  the  significance,  for  individual  purposes,  of  the 
good  in  question, — whether  sui  generis  or  as  one  good  out  of 
a  stock  of  similar  goods, — as  forming  a  part  of  a  particular 
entrepreneur  complex.  The  purchaser  of  the  production 
good  may  or  may  not  be  near  to  paying  for  it  all  he  can; 
and  while  with  one  item  out  of  a  stock  the  quasi-rent  fact 
is  probably  a  smaller  quantity  than  in  case  of  an  isolated 
good,  there  is  no  reason  to  suppose  that  it  is  entirely  non- 


POSITIVE  THEORY  AND  NATURAL  VALUE       365 

existent.  As  applied  to  the  inner  relations  of  the  entre- 
preneur complex,  the  doctrine  here  insisted  upon  with  so 
niuch  emphasis  is,  indeed,  merely  an  application  of  Wieser's 
general  doctrine:  "We  only  estimate  it  [the  farm  horse] 
at  a  portion  of  the  decrease  that  would  ensue  were  the 
owner  obliged  to  farm  without  it."  ^*  To  value  the  horse 
according  to  all  of  the  loss  is  to  value  it  at  more  than  one 
would  need  pay,  and  is  at  the  same  time  to  make  it  impossible 
to  pay  for  the  other  goods  upon  a  similar  basis,  or  even  to 
pay  for  them  what  under  competitive  conditions,  would 
need  be  paid  for  them. 

Wieser  fails,  however,  to  see  that,  in  point  of  fact,  the 
accurate  attribution  or  imputation  of  productiveness  is 
impossible  upon  the  market,  simply  because  it  is  impossible 
inside  the  entrepreneur  complex.  The  entrepreneur  him- 
self cannot  tell  how  much  the  good  in  question  produces 
for  him,  but  only  how  much  he  can  afford  to  pay  for  it  to 
go  with  his  other  goods  and  his  own  productive  powers, 
rather  than  to  go  without  it. 

In  joint  production  the  specific  productivities  of  the  dif- 
ferent productive  agents  are  clearly  not  obtainable;  and  in 
truth  also,  the  productivity  of  any  agent  working  in  isola- 
tion is  not  obtainable,  simply  because  no  good  ever  so 
works ;  the  entrepreneur  fact,  the  director,  is  always  in  the 
background,  and  the  productivity  is  therefore  a  produc- 
tivity relative  to  him ;  thus  the  productivity  must  be  a  differ- 
ent one  with  each  different  entrepreneur.  But  even  if  this 
be  somehow  not  entirely  past  question,  it  surely  is  clear  that 
the  aggregate  productiveness  of  agents  employed  in  com- 
bination is  greater  than  the  sum  of  their  powers  in  isolated 
production,  that  it  is  precisely  for  this  reason  that  they 
are  placed  in  combination,  and  that  the  increment  of  product 
from  the  very  fact  of  combination  is  a  joint  product  not 
accurately  to  be  distributed  in  terms  of  specific  and  dis- 
tinguishable productiveness.  In  some  slight  measure,  at 
least,  there  must  be  in  every  case  some  question  of  joint 
surplus  product  like  that  of  the  rifle-and-cartridge  case, 
or  like  the  case  of  the  unique  painter  and  unique  material. 
The  only  practicable  analysis  is  that  of  the  entrepreneur 
who  attributes  to  himself  as  profit  all  that  he  does  not  have 
to  pay  for  the  co-operating  goods ;  but  it  is  obvious  that  this 
analysis  sacrifices  accuracy  to  practicability. 

^Wieser,  op,  cit,,  p.  91. 


366  VALUE  AND  DISTRIBUTION 

This  appeal  to  the  entrepreneur  computation  and  the 
entrepreneur  bid  suppHes  the  missing  Hnk  in  the  argument 
of  Wieser  with  reference  to  the  different  equations ;  some- 
how, he  says,  the  market,  out  of  all  the  different  equations, 
arrives  at  a  marginal-utility  imputation  for  each  productive 
good.  If  it  really  does  so,  and  so  far  as  it  does  so,  it  is 
done  by  the  bidding  of  entrepreneurs : 

To  each  single  item  or  quantity  is  imputed  the  smallest  contri- 
bution which  under  the  circumstances  can  be  economically  arrived 
at  by  the" employment  [employer]  of  the  particular  item  or  quantity, — 
the  marginal  contribution  [the  marginal  employer's  bid  based  on 
contribution]  ....  or,  looking  at  it  from  a  different  point  of 
view,  the  marginal  product  [product  to  the  marginal  employer,  if 
only  this  were  accurately  ascertainable]. 

Productive  elements  which  admit  of  only  one  kind  of  employ- 
ment do  not  share  the  multiplicity  of  conditions  necessary  for  the 
emergence  of  what  we  recognize  as  costs." 

This  will  be  recalled  as  substantially  the  view  adopted 
by  Boehm-Bawerk  as  the  relation  of  monopoly  goods  to 
cost  of  production,  monopoly  goods  being  understood  by 
Boehm-Bawerk  to  mean,  in  this  connection,  scarce  goods, 
goods  not  reproducible  at  will,  like  land,  exceptional  ability, 
etc.  But  it  must  be  noted  that  Wieser's  doctrine  does  not 
exclude  the  goods  from  cost  bearing  on  the  ground  of 
scarcity  or  of  non-reproducibility,  but  only  because  of  the 
want  of  alternative  applications.  And  this  is  unquestion- 
ably good  cost  doctrine  for  collectivist  or  for  Crusoe  eco- 
nomics. And  if  it  were  possible  to  make  certain  that 
Wieser  is  all  the  while  in  the  collectivist  analysis,  there 
could  be  no  room  for  serious  criticism,  except  to  point  out 
that  the  application  to  competitive  economics,  if  not  made, 
calls  imperatively  to  be  made,  and  to  point  out  also  that,  if 
made  upon  the  basis  left  possible  by  Wieser,  it  can  be  made 
only  with  the  utmost  of  difficulty, — or,  if  readily  made, 
must  almost  certainly  be  erroneously  made.  Monopoly 
goods,  in  the  sense  of  land  or  of  high  ability,  are  cost  goods 
in  either  type  of  reckoning,  to  the  extent,  at  least,  of  the 
alternative  applications.  But  in  the  competitive  economy, 
any  production  good  is  a  cost  good  to  the  extent  that  it 
necessitates  a  cost  outlay  to  command  it.     In  the  accurate 

''Wieser,  op,  cit.,  p.  175. 


POSITIVE  THEORY  AND  NATURAL  VALUE       367 

sense,  indeed,  the  displacement  principle  applies  here ;  the 
productive  good  could  have  served  in  the  hands  of  another 
entrepreneur ;  the  expense  incurred  by  the  renting  entre- 
preneur might  have  been  otherwise  directed. 

This  is  perhaps  the  point  at  which  to  discuss  a  forcible 
and  plausible  objection  against  regarding  as  a  cost  the  rent 
paid  for  a  good  having  only  one  productive  application,  the 
cranberry  patch,  for  example.  It  may  be  speciously  urged 
that  the  rent  advanced  by  the  tenant,  or  foregone  by  the 
cultivating  owner,  while  a  cost  charge  in  the  individual 
reckoning,  and  in  that  sense  a  cost,  has  yet  no  cost-causal 
bearing  upon  market  value ;  the  land  will  be  used  by  some- 
one ;  the  rent  is  not  a  condition  to  the  productive  function- 
ing of  the  land ;  it  will  be  used  by  some  other  cultivator,  if 
the  present  cultivator  refuses  the  rent  outlay ;  our  cranberry 
patch,  being  good  for  nothing  for  any  other  purpose,  cannot 
be  driven,  because  of  low  rent,  into  other  uses,  and  will 
remain  in  the  cranberry  service,  whether  or  not  the  owner 
sell,  or  the  tenant  abandon  to  another  cultivator ;  the  cran- 
berry patch  is  therefore  not  a  fact  through  which  the  supply 
term  of  the  value  equation  may  evince  any  of  that  flexi- 
bility whereby  prices  receive  their  modification. 

But  evidently  thus  much  might  be  argued  for  capital  and 
for  its  remunerations,  with  only  a  long-run  distinction 
possible  for  such  lands,  if  there  are  any,  as  are  independent 
of  upkeep  and  incapable  of  exhaustion.  But  there  is  no 
reason  why  cranberry  land,  or  any  other  cultivated  land,  or 
any  form  of  specialized  instrumental  good,  may  not,  with 
time  enough,  be  exhausted ;  that  is  to  say,  most  instru- 
mental goods,  however  specialized,  are  in  the  long  adjust- 
ment mobile  in  their  capital-value  aspect. 

But  it  must  be  admitted  that  goods  of  no  alternative 
use  differ  from  other  goods  with  respect  to  the  efifect  of  a 
dim.inishing  demand  for  products,  that  is,  dififer  with 
respect  to  the  degree  of  elasticity  in  supply,  but  differ 
nevertheless  only  in  degree.  With  falling  prices,  some 
acres,  or  what  amounts  to  the  same  thing,  some  intensive 
possibilities,  of  the  cranberry  field  will  be  abandoned, — will 
not,  it  is  true,  go  into  other  lines  of  product,  but  none  the 
less  will  go ;  the  labor  and  capital — the  expense — go  in  part 
elsewhere;  and  if  the  entrepreneur  departs  leaving  a  new 


368  VALUE  AND  DISTRIBUTION 

tenant  to  follow  him,  this  new  tenant  will  fail  to  utilize  the 
land  at  the  old  degree  of  efficiency,  at  the  same  tension 
of  productive  power;  and  the  new  tenant  is  himself  not  as 
efficient  a  producer  as  the  old, — was  in  fact  outbid  by  the 
earUer  tenant  on  the  earlier  level  of  prices,  this  earlier 
tenant  now  finding  the  cranberry  enterprise  at  the  present 
level  of  prices  not  worth  his  while.-" 

Supply  conditions  have  then  been  somewhat  disturbed. 
But  the  degree  of  bearing  of  costs  upon  value  is  in  any 
case  easily  exaggerated, — which  fact  was  in  Mill's  mind 
when  he  argued  that  only  relative  wages  and  relative  profits 
should  figure  as  costs.  But  if  only  those  outlays  not  pro- 
portionate to  efficiency  rendered  are  reckoned  as  costs,  the 
situation  will  become  hopeless  of  analysis  for  cost  purposes. 
Because  of  difi'erences  in  entrepreneurs,  and  thereby  differ- 
ences in  the  relations  of  efficiency  to  outlay,  and  because  of 
the  different  technological  conditions  of  different  lines  of 
production,  there  is  nothing  for  the  case  but  to  reckon  all 
outlays  as  costs,  and  for  that  matter,  also,  all  tediums, 
repugnances,  and  counter-attractions,  whether  absolute  or 
relative. 

But  it  remains  true  that  only  differences  of  cost,  relative 
to  efficiency,  seriously  affect  the  value  outcome.  We  must, 
however,  view  as  costs  all  that  the  entrepreneur  regards  as 
burden  in  arriving  at  his  choice  of  occupations,  all  that  he 
charges  up  against  the  chosen  occupation  as  a  resistance 
to  production  and  as  necessary  to  be  overcome  in  his  market- 
price  remuneration.  All  his  outlays  rank  for  him  as  data 
in  making  his  choice  between  lines  of  activity.  It  is,  indeed, 
only  as  working  out  through  entrepreneur  computations 
and  entrepreneur  competitions,  that  production  goods  of 
any  sort  acquire  value  or  rental,  or  rank  as  costs,  and  come 
thereby  to  have  their  little  or  much  bearing  on  the  relative 
volumes  of  goods  seeking  exchange  against  one  another. 
That  there  is,  for  any  purpose,  a  not  greater  relative  supply 
of  production  goods — whether  of  non-alternative  use  or  of 
many  uses — is  the  reason  for  relatively  few  products,  high 

^^  It  is,  however,  true  that  cases  may  be  imagined  where  no  expense 
or  labor  of  upkeep  is  necessary, — a  cranberry  patch,  for  example,  where 
the  more  one  should  disturb  it  the  less  satisfactory  would  be  the 
results.  But  even  assuming  such  a  case,  the  most  that  can  be  said  is 
that  it  does  not  matter  whether  rent  is  or  is  not  reckoned  as  a  cost, 
since  the  supply  is  independent  of  all  cost  influences. 


POSITIVE  THEORY  AND  NATURAL  VALUE       369 

prices,  and  a  high  vakie  level  for  the  production  goods  in 
question.  Ultimately  cost  is  a  way  of  expressing  that  we 
cannot  have  more  of  the  agent  unless  upon  more  expensive 
terms — perhaps  not  even  then — and  can  have  what  we  have 
only  upon  the  present  terms  of  expense.  But  the  explana- 
tion of  the  actually  existing  limitation  upon  the  supply  of 
production  goods  may  or  may  not  be  in  the  diminutions  and 
diversions  due  to  other  industries ;  it  may  simply  be  that 
there  are  no  more  agents.  For  the  purposes  of  competitive 
production,  Wieser's  and  Boehm-Bawerk's  view  that  a  good 
is  not  the  basis  of  a  cost  unless  the  good  has  alternative 
applications  amounts  practically  to  saying  that  nothing  can 
be  a  cost  once  that  is  not  a  cost  twice.  This  view  implies 
also  that  some  distributive  shares  for  employed  agents  are 
not  costs  at  all,  thus  raising  the  question  whether  distribu- 
tion need,  on  Wieser's  own  basis,  have  been  treated  prior 
to  costs. 

"Practically,"  Wieser  says,  "it  would  seem  to  come  to 
this ;  that  the  imputation  of  the  share  due  to  the  monopoly 
goods  is  made  after  that  due  to  the  cost  goods  is  finished. "^'^ 
This  appears  to  be  Ricardo's  old  rent-and-cost  doctrine, 
albeit  possibly  none  the  worse  for  that.  But  Wieser  adds, 
though  with  precisely  what  significance  is  not  at  all  clear, 
that 

it  is   only  in  the   individual    case   that   such    a   calculation    can   be 

made A      sufficiently     wide      consideration      shows      that 

monopoly  goods  come  altogether  under  the  ordinary  conditions  of 
valuation,   and   differ    from    other   economic   goods    only   that   they 

display  much  more  strikingly  the  character  common  to  all 

Only  the  greater  part,  not  the  whole,  of  the  "undivided  residue"  is 
to  be  imputed  to  the  good  in  question."' 

Bearing  in  mind  that,  for  the  most  part,  the  criticism 
here  made  attaches  only  to  the  relation  set  up  between  dis- 
tributive shares,  and  bearing  in  mind  also  that,  interpreting 
monopoly  goods  merely  as  scarcity  goods, — non-reprodu- 
cible goods, — there  is  no  very  considerable  objection  to  be 
made  to  the  doctrine  presented  in  its  bearing  upon  present 
issues,  it  yet  remains  to  be  repeated  that,  purely  as  distribu- 
tive doctrine  and  subjected  to  the  requirements  of  theroeti- 

"^  Wieser,  op.  cif.,  p.  no. 
^  Ibid.,  pp.   no,  III. 


370  VALUE  AND  DISTRIBUTION 

cal  accuracy,  it  will  not  stand.  The  entrepreneur  is  always 
in  the  background  to  share  in  or  to  take  the  residue  in  ques- 
tion; it  therefore  cannot  all  go  to  the  hired  scarcity  good; 
the  entrepreneur  is  himself  a  monopoly  good  for  the  pur- 
poses of  the  case ;  this  makes  two  monopoly  goods. -^ 

As  we  have  already  seen,  there  is  danger  of  confusing 
with  each  other  two  different  sorts  of  land  differentials, 
(i)  the  entire  value  differential  measured  from  the  rentless 
margin,  or,  as  it  is  sometimes  viewed,  from  the  lowest-rent 
land  in  use;  and  (2)  a  quasi-rent  form  of  differential 
expressing  value-wise  the  superiority  of  land  for  one  use 
over  its  best  alternative  use.  This  second  sort  of  land  dif- 
ferential, as  representing  no  displacement,  could  not,  in  a 
collectivist  economy,  be  computed  as  cost.  The  other  dif- 
ferential, the  ordinary  rent  of  competitive  production, 
would  be  irrelevant  to  collectivist  computations.  For  ques- 
tions of  cost  in  the  competitive  economy,  the  case  is  just  the 
other  way  about ;  all  competitive  rent  paid  is  cost ;  the 
quasi-rent  differential  is  as  cost  irrelevant.^** 

Wieser  appears  to  confuse  these  two  rent  concepts, 
though  this  can  be  asserted  only  hesitatingly,  because  of  the 
difficulty  of  being  positive  as  to  whether  the  discussion  is  in 
the  collectivist,  the  natural-value,  field,  or  in  the  field  of 
competitive  production.  The  early  portion  of  his  chapter 
on  "Land  Rent  as  Cost"  ^^  seems  to  imply  that  rent  as  a 
general  differential  of  value  productivity — rent  measured 
from  the  rentless  land  margin — is  no  part  of  cost;  which 
would  be  meaningless  for  collectivist  purposes,  and  untrue 
for  competitive  purposes.  But  he  asserts  that  "when  all 
lands  and  all  powers  of  the  land  ....  bear  rent,"  the 
rent  must  be  included ;  and  this  also,  as  applied  to  collect- 
ivist production,  must  be  untrue,  irrespective  of  its  seeming 
implication  that  all  powers  of  the  land  can  ever  be  rent-bear- 
ing.    At  the  very  close  of  the  chapter,  however,  it  is  said : 

""The  same  criticism  applies  to  the  following:  "The  personal 
income  which  land  yields  is,  in  the  last  resort,  dependent  upon  the  fact 
that  the  land  in  question  yields  a  return  such  that,  after  the  shares  of 
capital  and  labor  are  deducted,  there  remains  a  share  which  must,  on 
natural   laws,  be  imputed   to  the  land." — Wieser,  op.  cit.,   p.    114. 

'"  And  there  is  really  another  concept  of  rent,  the  superiority 
of  a  particular  piece  of  land  for  a  particular  use  over  the  poorest  of 
land  devoted  to  that  use  ;  but  this  third  form  does  not  concern  this 
particular  discussion. 

'^  Wieser,  op.  cit.,  Book  V,  chap,  xiii,  p.  217. 


POSITIVE  THEORY  AND  NATURAL  VALUE       371 

"That  the  rent  of  land  does  not  enter  into  cost  can  be  legiti- 
mately applied  only  to  land  devoted  of  necessity  to  one  dis- 
tinct use,  such  as  mines,  vineyards,  and  the  like," — an 
accurate  statement  if  intended  only  as  a  natural-value 
doctrine. 

But  upon  the  same  page,  in  substantial  conformity  with 
the  views  already  discussed  of  Mill,  Jevons,  Patten,  Hob- 
son,  and  others,  but  still  not  clearly  in  the  competitive  field, 
Wieser  goes  on  to  show  that  "if  a  fertile  field  is  employed 
as  site  for  a  factory,  the  agricultural  rent  which  in  other 
circumstances  might  be  expected  from  it  ...  .  cannot 
be  neglected  in  calculating  the  costs  of  the  factory's 
products The  differential  rents  which  are  surren- 
dered take  effect  as  costs."  This  appears,  on  the  whole,  to 
be  competitive  doctrine  and  as  such  is  unacceptable:  if  it  is 
really  intended  as  collectivist  doctrine,  the  talk  should  be  of 
the  products  possible,  and  not  of  the  surrendered  rents. 


CHAPTER   XX 
THE  ATTEMPT  AT  RECONCILIATION:     MARSHALL' 

Marshall's  treatment  of  demand  price  is  a  great  advance 
over  that  of  the  Austrians,  and  is  in  the  main  firmly  and 
consistently  held,  both  in  terminology  and  in  essential 
thought.  Whether  so  much  can  be  said  for  his  analysis  of 
supply  price  is  not  so  clear. 

And  there  are  some  inadequacies  in  his  discussion  of  the 
relation  between  utility  and  price,  in  that,  at  times,  he 
seems  to  believe  that  price  may,  after  all,  to  the  individual, 
stand  as  a  measure  of  marginal  utility.- 

^  The  5th  edition  of  Marshall's  Principles  comes  to  hand  as  the 
present  work  is  passing  through  the  press.  It  has  not  seemed 
practicable  entirely  to  rewrite  this  chapter,  nor — from  such 
hasty  examination  of  the  new  edition  as  has  been  possible — would 
this  appear  to  be  called  for ;  thus,  wherever  in  the  new  edition  the 
original  citation  has  been  found  without  substantial  change,  the  fact 
is  so  indicated  by  parenthetical  reference. 

^  "The  price  will  measure  the  marginal  utility  to  each  purchaser 
individually :  we  cannot  speak  of  price  as  measuring  marginal  utility  in 
general,  because,  the  wants  and  circumstances  of  different  men  are 
different." — Alfred  Marshall,  Principles  of  Economics,  4th  ed.,  Mac- 
millan,  1898,  p.  174   (5th  ed.,  p.   99). 

And  in  criticism  of  Jevons,  it  is  said :  "He  has  led  many  of  his 
readers  into  a  confusion  ....  by  speaking  without  qualification  of 
the  price  of  a  thing  as  measuring  its  final  utility,  not  only  to  an 
individual,  which  it  can  do,  but  also  to  'a  trading  body'  which  it 
cannot  do." — Ibid.,  p.  176,  note  (5th  ed.,  p.    loi). 

"For  each  of  [two  men,  one  rich,  one  poor]  the  marginal 
utility  is  measured  by  sixpence  ;  but  this  marginal  utility  is  greater  in 
the  case  of  the  poorer  man  than  in  that  of  the  richer." — Ibid., 
p.    170   (5th  ed.,  p.    95). 

In  fact,  however,  as  Marshall  would  probably  be  the  first  to  admit, 
the  sixpence  gives  neither  any  general  measure  of  utility  nor  any 
measure  to  any  particular  individual.  The  price  that  one  is  just 
willing  to  pay  is  an  expression  of  the  relation  in  utility  of  the  good 
under  consideration  to  other  goods  purchasable  with  the  same  money, 
but  gives  no  information  as  to  the  absolute  utility  of  any  of  these 
different  goods. 

372 


ATTEMPT  AT  RECONCILIATION  373 

Substantially,  however,  Marshall  recognizes  the  real 
nature  of  the  demand  margin : 

The  clerk  who  is  in  doubt  whether  to  ride  to  town,  or  to  walk 
and  have  some  little  extra  indulgence  at  his  lunch,  is  weighing 
against  one  another  the  (marginal)  utilities  of  two  different  modes 
of  spending  his  money.' 

On  the  supply  side  the  meaning  is  less  easy  to  arrive 
at  and  the  adequacy  of  the  doctrine  less  clear. 

In  the  line  with  the  classical  writers,  Marshall  has  a 
doctrine  of  iieaLxost,  but  in  just  what  way,  if  at  all,  it  is 
articulated  with  his  doctrine  of  money  cost  or  expenses  of 
production  is  not  evident.  It  is  said  that  with  labor  con- 
ceived as  the  only  productive  fact,  "the  price  required  to 
call  forth  the  exertion  necessary  for  producing  any  given 
amount  of  a  commodity  may  be  called  the  supply  price  for 
that  amount."     But  with  labor  and  capital  in  co-operation, 

the  exertions  of  all  the  different  kinds  of  labor  that  are  directly     ] 
or  indirectly  involved  in  making  it ;  together  with  the  abstinence  or     { 
rather  the  waitings  required  for  saving  the  capital  used  in  making    | 
it;  all  these  efforts  and  sacrifices  together  will  be  called  the  real  cost 
of  production  of  the  commodity.    The  sums  of  money  that  have  to  be 
paid  out   for  these  efforts   and   sacrifices   will   be   called   either   its 
money  cost  of  production,  or,   for  shortness,  its  expenses  of  pro- 
duction; they  are  the  prices  which  have  to  be  paid  in  order  to  call 
forth  an  adequate  supply  of  the  efforts  and  waitings  for  making  it ; 
or,  in  other  words,  they  are  its  supply  price.* 

This  appears  to  say  that  real  costs  are  the  costs  to  the 
people  who  selljDr  rent  their  various  services  to  the  entre- 
preneur ;  while  money  costs  are  costs  from  the 
point  of  view  of  the  entrepreneur.  This  is  surely 
a  valid  distinction,  if  only,  over  against  the  danger 
of  confusion  through  it,  there  are  counterbalancing 
advantages.  But  is  it  true  that  the  quantum  of 
the  sacrifice  in  effort  and  waiting  has  anything  to  do  with 
the  quantum  of  the  payment?  How  close  and  how  definite  ^ 
is  the  relation?  Is  there  in  real  costs  any  basis  for  money  \ 
costs  ?    What  is  the  connection  ?    What  is  the  reason  that  it 

^  Ibid.,  p.  193   (5th  ed.,  p.    118). 
*  Ibid.,   p.    418    (5th    ed.,    p.    339). 


374  VALUE  AND  DISTRIBUTION 

takes  three  dollars  instead  of  two  to  command  the  day's 
service  of  a  carpenter,  or  six  dollars  for  the  mason?  Is  it 
a  matter  of  the  effort  pain  purely,  or  has  what  the  laborer 
can  get  somewhere  else  the  more  to  do  with  it?  The  iden- 
tification of  supply  price  with  the  necessary  price  is  admir- 
able and  illuminating.  But  why  are  these  prices  thus  or  so  ? 
Marshall  leaves  it  to  be  inferred  that  the  solution  traces 
back  to  real  cost ;  but  he  does  not  say  so,  nor  does  he  attempt 
to  trace  any  connection.  And  again,  these  money  pay- 
ments in  compensation  of  the  real  costs  seem  to  be  identified 
with  the  supply  price,  the  entrepreneur  cost ;  this  leaves,  as 
part  of  necessary  or  minimum  cost,  nothing  for  the  entre- 
preneur. But  if  "the  supply  price  of  a  commodity  is  the 
price  at  which  it  will  be  delivered  for  sale"  to  those  who 
demand  it,  this  price  must  be  more  and  other  than  mere 
expense  cost. 

But  two  or  three  pages  later  the  normal  supply  price 
is  presented  through  the  device  of  the  representative  firm, 
its  normal  expenses  of  production  being  taken  as  the 
normal  supply  price,  but  these  expenses  being  interpreted  to 
include  gross  earnings  of  management.^ 

^Marshall,  op.  cit.,  p.  422  (5th  ed.,  p.  343). 

This  representative-firm  notion  is  so  widely  accepted  in  later 
theory,  and  its  influence  so  important  for  good  or  ill,  that  some 
especial  attention  is  called  for  in  order  to  determine  the  precise  nature 
and  content  of  the  notion.  Is  it  a  long-time  or  a  short-time  concept? 
If  the  price  of  any  particular  time  is  determined  by  the  cost  to  the 
representative  firm  of  that  time,  is  this  to  be  taken  as,  for  the  purpose, 
an  abandonment  of  the  marginal  analysis?  What  about  the  costs  of 
the  firms  of  lower  grade?  Do  these  firms  fall  short  of  receiving  for 
their  costs  full  indemnity  from  market  prices  ?  Or  are  their  profits 
merely  smaller,  but  adequate?  And  what  is  to  become  of  these  poorer 
firms?  and  when?  and  why? 

Or  if  the  doctrine  points  not  to  present  costs  and  their  explana- 
tion, but  only  to  the  long-time  adjustment,  are  we  to  understand  the 
representative  firm  to  be  one  that,  in  the  trend  of  competitive  forces, 
is  likely  to  acquire  control  of  the  market,  a  long-time  best  firm,  or 
rather  a  long-time  average  firm,  or  a  long-time  marginal  firm? 

And  whether  or  not  the  commensurability  of  price  with  marginal 
entrepreneur  cost,  rather  than  with  cost  on  marginal  land,  is 
taken  to  hold  in  agriculture,  is  it  to  be  understood  that,  in 
manufacturing,  some  better  or  best  firm  fixes  the  price?  And  if  so,  is 
this  victory  price  to  be  regarded  as  expressing  any  cost  quantum  with 
respect  to  this  better  or  best  firm  ? 

If  the  representative-firm  notion  is  an  abandonment  of  the 
marginal  analysis,  is  it  a  substitution   of  the   method   of  averages  and 


ATTEMPT  AT  RECONCILIATION  375 

Since  business  ability  in  command  of  capital  moves  with  great 
ease  horizontally  from  a  trade  which  is  overcrowded  to  one  which 
offers  good  openings  for  it ;  and  since  it  moves  with  great  ease 
vertically,  the  abler  men  rising  to  higher  posts  in  their  own  trade, 

normals  ?  Or  are  we  rather  looking  for  the  marginal  cost  of  an 
average  firm,  long  or  short  time  as  the  case  may  be  ? 

And  if,  because  there  are  all  sorts  of  ups  and  downs  in  business, 
normals  and  averages  are  to  rule,  why  is  not  the  average  method 
equally  valid  for  labor  computations  in  the  cost  problem,  the  value 
of  masons'  or  doctors'  or  lawyers'  services  coming  to  coincide  with  the 
wage  or  salary  of  the  average  or  representative  man  in  the  occupa- 
tion— taken  at  the  time  of  his  medium  earning  capacity  ? 

And  if  we  have  in  some  sort  to  do  with  the  average  principle, 
shall  we  take  the  representative  firm  to  be  simply  and  merely  an 
average  firm,  or  the  long-time  average  of  pretty  much  any  firm,  or 
the  long-time  average  of  an  average  firm  ?  And  average  in  what 
respect?  In  size?  In  skill  of  management?  In  good  fortune?  In 
methods  ?     In  manner  of  organization  ? 

But  all  these  problems  may  perhaps  reach  their  solution  with  the 
unfolding  of  the  concept:   precisely   what  is  a   representative  firm? 

"Though  in  manufacturing,  at  least,  nearly  every  individual 
business,  so  long  as  it  is  well  managed,  tends  to  become  stronger  the 
larger  it  has  grown ;  and  though  prima  facie  we  might  therefore  expect 
to  see  large  firms  driving  their  small  rivals  completely  out  of  many 
branches  of  industry,  yet  they  do  not  in  fact  do  so"  (p.  371)  (5th  ed., 
p.   241). 

'"When  a  man  has  got  together  a  great  business,  his  descendants 
often  fail,  in  spite  of  their  great  advantages,  to  develop  the  high 
abilities  and  the   special   turn   of  mind   and   temperament   required   for 

carrying  it  on  with  equal  success For  a  time,  indeed,  all  may 

go  well By  mere  assiduity  and  caution,  availing  them- 
selves of  the  traditions  of  the  firm,  they  may  hold  together  for  a  long 
time.  But  when  a  full  generation  has  passed  ....  the  business 
almost  invariably  falls  to  pieces  unless  it  is  practically  handed  over  to 
the  management  of  new  men  who  have  meanwhile  risen  to  partnership 
in   the  firm"    (p.  379)    (5th  ed.,   p.   299). 

"The  superintendence  of  labor  is  but  one  side,  and  often  not  the 
most  important  side  of  business  work The  ideal  manufac- 
turer ....  must  have  the  power  of  forecasting  the  broad  move- 
ments of  production  and  consumption He  must  be  a  natural 

leader  of  men,  ....  a  power  of  first  choosing  his  assistants  rightly 
and  then  trusting  them   fully  ;   of  interesting  them  in  the  business  and 

of  getting   them   to   trust  him The   abilities   required   to   make 

an  ideal  employer  are  so  great  and  so  numerous  that  very  few  persons 
can  exhibit  them  all  in  a  high  degree"  (p.  377)   (sth  ed.,  p.  297). 

"It    is    obvious    that    the    son    of    a    man    already    established    in 

business    starts    with    very    great    advantages    over    others It 

would,  therefore,  at  first  sight  seem  likely  that  business  men  should 
constitute  a  sort  of  caste"  (pp.  378,  379)  (sth  ed.,  p.  298).  "But  we 
may  read  a  lesson  from  the  young  trees  of  the  forest  as  they  struggle 
upwards  through  the  benumbing  shade  of  their  rivals.     Many  succumb 


376 


VALUE  AND  DISTRIBUTION 


....  in  modern  England  the  supply  of  business  in  command  of 
capital  accommodates  itself,  as  a  general  rule,  to  the  demand  for 
it;  and  thus  has  a  fairly  defined  supply  price.  Finally,  we  may 
regard  this  supply  price  of  business  ability  in  command  of  capital 

on  the  way,  and  a  few  only  survive  ;  these  few  become  stronger  with 
every  year,  they  get  a  larger  share  of  light  and  air  with  every  increase 
of  their  height,  and  at  last  in  their  turn  they  tower  above  their  neigh- 
bors, and  seem  as  though  they  would  grow  on  forever,  and  forever 
become  stronger  as  they  grow.  But  they  do  not.  One  tree  will  last 
longer  in  full  vigor  and  attain  a  greater  size  than  another ;  but 
sooner  or  later  age  tells  on  them  all.  Though  the  taller  ones  have  a 
better  access  to  light  and  air  than  their  rivals,  they  gradually  lose 
vitality  ;  and  one  after  another  they  give  place  to  others,  which,  though 
of  less  material  strength,   have  on  their  side  the  vigor  of  youth. 

"And  as  with  the  growth  of  trees  so  it  is  with  the  growth  of 
businesses.  As  each  kind  of  tree  has  its  normal  life  in  which  it  attains 
its  normal  height,  so  the  length  of  life  during  which  a  business  of  any 
kind  is  likely  to  retain  full  vigor  is  limited  by  the  laws  of  nature 
combined  with  the  circumstances  of  place  and  time,  and  the  character 
and  stage  of  development  of  the  particular  trade  in  which  it  lies" 
(pp.  394,  395)   (5th  ed.,  p.  315), 

But  that  all  this  is  both  truly  and  beautifully  said  leaves  it  still  to 
be  asked  what  it  means  for  the  purpose.  Certainly  there  are  all  sorts 
of  firms,  and  all  degrees  of  flux  and  change  among  them  ;  but  so  there 
are  all  sorts  of  wage-earners,  of  independent  producers,  of  land,  of 
machines ;  and  it  has  sometimes  been  thought  that  by  the  very  fact 
of  all  these  differences,  the  marginal  analysis  is  imperatively  imposed. 
And  doe's  it  at  all  matter  to  the  doctrine  that,  more  and  more,  4;he  firm 
organization  is  giving  way  to  the  corporate?     But  to  continue: 

"There  is  no  rule  of  universal  application  ;  but  ....  as  a  gen- 
eral rule  subject  to  important  exceptions,  an  increase  in  the  total  volume 
of  any  branch  of  production  tends  to   increase  the  average  size  of  the 

businesses     engaged     in     it Many   ....   economies     depend 

directly   on   the    size   of  the   individual    establishments    engaged    in    the 

production An  increase   in   the  aggregate   scale   of  production 

of  course  increases  those  economies  which  do  not  directly  depend  on  the 

size  of  individual  houses  of  business Correlated  branches   of 

industry   ....   mutually   assist   one  another The   economies 

arising  from  such  sources  as  this,  which  are  accessible  to  any  branch 
of  production,  do  not  depend  exclusively  on  its  own  growth  ;  but  yet  they 
are  sure  to  grow  rapidly  and  steadily  with  that  growth  ;  and  they  are 
sure  to  dwindle  in  some,  though  not  in  all  respects,  if  it  decays" 
(p.  396)   (5th  ed.,  p.  317). 

"When  we  come  to  discuss  the  causes  which  govern  the  supply 
price  of  a  commodity,  we  shall  have  to  analyze  carefully  the  normal 
cost  of  producing  a  commodity,  relatively  to  a  given  aggregate  volume 
of  production  ;  and  for  this  purpose  we  shall  have  to  study  the  expenses 

of  a   representative   producer   for   that   aggregate   volume We 

shall  not  want  to  select  some  new  producer  just  struggling  into  busi- 
ness, who  works  under  many  disadvantages,  and  has  to  be  content  for  a 
time  with  little  or  no  profits,  but  who  is  satisfied  with  the  fact  that  he  is 


ATTEMPT  AT  RECONCILIATION  377 

as  composed  of  three  elements.  The  first  is  the  supply  price  of 
capital;  the  second  is  the  supply  price  of  business  ability  and  energy; 
and  the  third  is  the  supply  price  of  that  organization  by  which  the 
appropriate  business   ability   and   the   requisite   capital    are  brought 

establishing    a    connection Nor    on    the    other    hand    shall    we 

want  to  take  a  firm  which  by  exceptionally  long-sustained  ability  and 
good  fortune  has  got  together  a  vast  business,  and  huge  well-ordered 
workshops  that  give  it  a  superiority  over  almost  all  its  rivals.  But 
our  representative  firm  must  be  one  which  has  had  a  fairly  long  life, 
and  fair  success,  which  is  managed  with  normal  ability,  and  which  has 
normal  access  to  the  economies,  external  and  internal,  which  belong  to 
that  aggregate  volume  of  production"  (p.  397)   (5th  ed.,  p.  318). 

But  does  this  mean  that  the  price  at  any  particular  time  must  be 
the  cost  to  this  firm  at  this  mid-time  of  its  career?     It  seems  so: 

"The  normal  supply  price  of  any  amount  of  that  commodity  may  be 
taken  to  be  its  normal  expenses  of  production  (including  gross  earn- 
ings of  management)    by  that    [the   representative]    firm This 

is  the  price  the  expectation  of  which  will  just  suffice  to   maintain  the 

existing    aggregate    of    production A    price    higher    than    this 

would  increase  the  growth  of  the  rising  firms,  and  slacken,  though  it 
might  not  arrest,  the  decay  of  the  falling  firms,  with  the  net  result  of  an 
increase  in  the  aggregate  production.  And,  on  the  other  hand,  a  price 
lower  than  this  would  hasten  the  decay  of  the  falling  firms,  and  slacken 
the  growth  of  the  rising  firms ;  and  on  the  whole  diminish  production" 
(p.  422)    (5th  ed.,  p.  343). 

But  none  of  this  appears  to  involve  any  appeal  to  representative 
or  average  phenomena  ;  it  is  rather  a  typical  marginal  analysis ;  but — 

"Anyone  proposing  to   start   a  new  business  in  any  trade   .... 

if  himself  a   man   of   normal   capacity   for   that   class   of   work 

may  look  forward  ere  long  to  his  business  being  a  representative  one, 
in  the  sense  in  which  we  have  used  this  term,  with  its  fair  share  of  the 
economies  of  production  on  a  large  scale.  If  the  net  earnings  of  such  a 
representative  business  seem  likely  to  be  greater  than  he  could  get  by 
similar  investments  in  other  trades  to  which  he  has  access,  he  will 
choose  this  trade"  (p.  449)   ("sth  ed.,  p.  2,yi^- 

This  evidently  takes  the  representative  firm  to  be  something  like 
an  average  firm  ;  and  it  is  here  said  that  any  average  man  who  con- 
cludes that  in  the  trade  in  question  he  would  turn  out  to  be  an 
average  man,  will  go  into  the  trade  if  he  notices  that  the  average  man 
in  that  trade  is  doing  better  than  average  men  outside.  True,  as  a 
doctrine  of  opportunity  cost ;  but  it  does  not  need  the  assumption  of 
average  men  to  be  true.  Any  inferior  or  superior  man  will  act  in 
precisely  the  way  outlined,  if  he  believes  that  men  of  his  grade  are 
finding  the  trade  in  question  more  remunerative  than  other  trades  to 
which  he  has  access.  And  there  is  nothing  in  any  case  to  indicate 
that  the  cost  of  this  average  man  will  coincide  with  the  price  of  the 
product,  or  to  indicate  that  the  cost  of  the  marginal  man  will  not  so 
coincide.  Thus  the  quotation  as  it  continues  presents  a  mistaken 
deduction  : 

"Thus  that  investment  in  a  trade,  on  which  the  price  of  the  com- 


378  VALUE  AND  DISTRIBUTION 

together.  We  have  called  the  price  of  the  first  of  these  three  ele- 
ments interest;  we  may  call  the  price  of  the  second  taken  by  itself 
net  earnings  of  management,  and  that  of  the  second  and  third,  taken 
together,    gross    earnings    of    management.'^ 

In  substance  this  is  evidently  an  opportunity-cost  analysis 
of  the  reasons  for  the  movement  of  entrepreneur  ability  and 
entrepreneur  capital  from  one  industry  to  another ;  it  has  no 
necessary  relevancy  to  the  representative  or  to  the  average 
firm,  and  depends  for  its  correctness  upon  no  assumption  of 
this  sort.  Accurately,  however,  it  does  imply  a  firm  or  a 
situation  where  the  wages  of  superintendence  are  only  just 
large  enough,  etc., — "the  price  the  expectation  of  which  will 
just  suffice  to  maintain  the  existing  aggregate  of  ^produc- 
tion," a  marginal-cost  price,  as  it  would  seem.  LBut  this 
appears  not  to  be  Marshall's  idea,  nor  is  it  possible — to  this 
writer  at  least — to  make  out  quite  precisely  what  the  idea 
is ;  the  notion  of  the  representative  firm  appears  to  lack 
something  in  point  of  theoretical  tangibilityT. 

Perhaps,  however,  the  doctrine  points  to  a  firm  which, 
in  the  long-time  adjustment,  with  all  its  ups  and  downs, 
will  pass  for  a  marginal  firm.  But  whether  this  be  safely 
assumed  or  not,  Marshall's  necessary  price  must  be,  on  the 
full  showing,  taken  to  include  more  than  mere  outlays, — 
must  be  understood  as  allowing  for  the  entreprenetir  share. 
But  we  still  await  information  as  to  what  determines  the 

modity  produced  by  it  depends  in  the  long  run,  is  governed  by  estimates 
on  the  one  hand  of  the  outgoings  required  to  build  up  and  to  work  a 
representative  firm,  and  on  the  other  of  the  incomings,  spread  over  a 
long  period  of  time,  to  be  got  by  such  price"  (p.  449)    (5th  ed.,  p.  377). 

"The  aggregate  production  for  a  general  market  is  the  outcome  of 
the  motives  which  induce  individual  producers  to  expand  or  contract 
their  production.  It  is  just  here  that  our  device  of  a  representative 
firm  comes  to  our  aid.  We  imagine  to  ourselves  at  any  time  a  firm  that 
has  its  fair  share  of  those  internal  and  external  economies,  which  the 
average  scale  of  production  in  that  trade  will  cause  to  accrue  to  such  a 
business"  (p.  514)   (sth  ed.,  p.  459)- 

This  last  quotation  puts  the  case  as,  indeed,  one  of  an  average 
firm,  but  not,  seemingly,  a  firm  of  average  size,  but  a  firm  that  by  its 
ability  or  by  its  organization — whatever  the  size — strikes  a  fair  average 
of  the  economies  of  productions  ;  this  average  cost  will,  it  is  inferred, 
be  the  market  price.  But  as  the  same  page  shows,  the  cost  in  question 
is  the  marginal  cost  of  this  average  firm: 

"This  then  is  the  marginal  cost  on  which  we  fix  our  eyes  ;"  and 
the  marginal  summary  reads :  "We  thus  get  at  the  true  long-period 
marginal  cost,  falling  with  a  gradual  increase  of  demand." 

'Marshall,  op.  cit.,  p.  392  (5th  ed.,  p.  313). 


ATTEMPT  AT  RECONCILIATION  379 

amount  of  this  share.  Is  real  cost  its  basis,  or  is  there  an 
opportunity-cost  reckoning  somewhere  in  the  background?^ 

In  an  earUer  chapter,^  it  is  aid:  "While  demand  is 
based  on  the  desire  to  obtain  commodities,  supply  depends 
mainly  on  the  overcoming  of  the  unwillingness  to  undergo 
'discommodities.'  These  fall  generally  under  two  heads : 
labor,  and  the  sacrifice  involved  in  putting  off  consumption." 
The  "discommodity"  in  the  labor  is  stated  to  include  bodily 
or  mental  fatigue,  unpleasant  surroundings  or  unpleasant 
companions,  injury  to  health,  and  displacement  of  recrea- 
tion. 

Now,  while  this  account  of  demand  and  supply  would, 
as  we  have  seen,  do  for  the  social  product  conceived  as  a 
unit  aggregate,  it  clearly  will  not  apply  to  explain  the  pur- 
chasing dispositions  with  reference  to  dififerent  classes  of 
goods  relatively  to  one  another,  and  will  not  serve  to  formu- 
late the  forces  of  resistance  to  the  production  of  the  various 
dififerent  lines  of  supply;  as  a  method  of  elucidating  the 
problem  of  the  exchange  relations  between  goods,  nothing 
but  confusion  results  from  this  affiliation  of  market  costs 
upon  real  costs.  Not  only  this  ;  but  while  this  catalogue  of 
real  costs  unquestionably  contains  some  items  of  true  pain 
quality — costs  in  this  real  sense-^^e  concept  is  wrongly 
permitted  to  include  the  loss  of  recreation  pleasure,  which 
is  not  a  cost  at  all  in  the  sense  of  pain,  but  only  of  oppor- 

"  On  page  217  (5th  ed.,  p.  142)  of  the  Principles,  Marshall  writes: 
"It  is  broadly  true  that  the  exertions  that  any  set  of  workers  will  make, 
rise  or  fall  with  a  rise  or  fall  of  the  remuneration  that  is  offered 
them  ;"  which  may  be  true  for  each  separate  man  under  different  levels 
of  payment,  but  hardly  true  of  different  men  relatively  to  each  other, 
and  hardly  true  of  all  men  as  affected  by  a  general  rise  of  wages  ;  but 
Marshall   continues :     "As  the  price  required   to  attract  purchasers   for 

any  given  amount  of  commodity,  was  called  the  demand  price 

so  the  price  required  to  call  forth  the  exertion  necessary  for  producing 
any  given  amount  of  a  commodity,  may  be  called  the  supply  price  for 
that  amount." 

Now  not  only  is  there  overmuch  suggestion  of  labor-pain  cost  here 
but  also  it  is  difficult  to  make  out  whether  Marshall  at  all  recognizes 
the  importance  of  alternative  remunerations.  He  does  not  so  indicate  ; 
the  question  seems  to  be  one  of  absolute  exertion  rather  than  of  rela- 
tive, and  this  without  attention  to  the  alternatives  in  results  ;  and  yet  in 
his  analysis  of  demand  price  he  has  clearly  and  satisfactorily  recognized 
the  principle  of  competing  and  resisting  alternatives  of  consumption. 

*  Book  IV,  chap,  i,  p.  215  (sth  ed.,  p.  140). 


380  VALUE  AND^DISTRIBUTION 

tunity.  And  on  the  side  of  capital  costs,  also,  there  is  a 
parallel  error ;  the  putting-off  of  consumption  is  a  sacrifice 
of  a  present  good,  a  resistance  to  be  overcome,  but  it  is  of 
a  different  category  from  pain  burden ;  it  is  merely  a  choice 
between  two  desirable  things ;  it  cannot  safely  be  forced  into 
the  pain-cost,  the  real-cost,  classification.  ^  Demand  points  to 
the  sacrifices  of  purchase ;  cost,  to  all  the  sacrifices  of  pro- 
duction ;  but  whose  sacrifices  and  whose  production  ?  Here 
again,  however,  it  is  difficult  to  determine  how  far,  on  the 
whole,  ]\Iarshall  is  open  to  criticism  upon  this  point.  For, 
in  substance,  he  appears  to  abandon  the  doctrine  of  real  ^/ 
cost  as  having  any  significance  for  exchange  relations. 
He  recognizes  that  much  productive  activity  takes  place 
entirely  or  mainly  for  its  ow^n  sake,  e.  g.,  in  literature  and 
in  science,  that  much  more  is  performed  for  the  benefit  of 
others,  and  that  "even  where  a  man  is  working  for  hire,  he 
often  finds  pleasure  in  his  work;  but  he  generally  gets  so 
far  tired  before  it  is  done  that  he  is  glad  when  the  hour  of 
stopping  arrives."  °  Perhaps  even  "he  might  rather  work 
for  nothing  than  not  work  at  all,"  but  not  generally..  But 
if  at  all,  what  becomes  of  the  real-cost  doctrine?  Nor  is 
there  great  help  in  the  fact  that  there  is  marginal  exertion 
and  marginal  production,  for  even  so,  the  margin  may  be 
one  of  choice  between  pleasures, — nor  help  in  the  fact  that 
the  work  willingly  done  gets  paid  by  the  measure  of  the 
rest,  or,  as  Marshall  puts  it,  that  "the  price  of  the  whole  is 
governed  [  ?]  by  the  sacrifice  required  from  him  by  that 
part  of  the  labor  which  he  gives  most  unwillingly,  and  is  on 
the  verge  of  refusing  to  give."  ^°  This  marginal  resistance 
may  still  be  wholly  one  of  choice  between  pleasurable  occu- 
pations, a  cost  by  displacement  of  recreation. 

*  Marshall,  op.  cit.,  p.  216   (5th  ed.,  p.   141). 

"Ibid.,  p.  216. 

Marshall's  position  as  to  the  relation  of  rent  to  price  forces  him 
into  some  regrettable  propositions  in  the  direction  of  making  marginal 
influences  "determining"  facts  rather  than  mere  "precisioning"  facts ; 
as,  for  example,  when  he  says  of  the  classical  doctrine,  "that  the 
price  ....  is  determined  by  the  expenses  or  money  cost  .... 
on  the  margin  of  cultivation  ;   and  that   rent  does  not  enter  into   cost, 

these  phrases  are  true  in  the  sense  in  which  they  were  meant 

Those  parts  of  the  produce  which  yield  a  surplus  will  generally  be  pro- 
duced even  if  that  price  is  not  maintained  ;  while  there  is  no  surplus 
yielded  by  that  portion  of  the  produce  the  expenses  of  production  of 
which  do  take  direct  part  in  governing  the  price."— Marshall,  op.  cit., 
p.  477. 

But    when    the    rent-cost    position    is    not    in    hazard,    the    correct 


ATTEMPT  AT  RECONCILIATION  381 

But  whatever  the  doctrine  of  real  cost  may  be  taken  to 
signify,  it  is  at  any  rate  clear  that  Marshall's  analysis  really 
accepts  and  adopts  the  point  of  view  of  entrepreneur  cost: 
"The  easiest  as  well  as  most  practical  course  is  to  go 
straight  to  production  for  sale  in  a  market."  ^^ 

The  undertaker  cares  little  for  real  cost :  "He  thinks 
chiefly  of  the  expenses  of  production  and  seldom  pays  much 
attention  to  the  efforts  and  sacrifices  to  which  those  pay- 
ments more  or  less  closely  correspond,"  and  which  consti- 
tute the  "real"  cost  of  production.  "The  modern 
business  man  commonly  takes  the  payments  which  he  has  to 
make,  whether  for  wages  or  raw  material,  as  he  finds 
them ;  without  staying  to  inquire  how  far  they  are  an  accu- 
rate measure  of  the  efforts  and  sacrifices  to  which  they 
correspond."  ^- 

This  should  doubtless  better  read  "to  which  they  do  not 
correspond ;"  marginal  individual  cost,  the  sundown  mar- 
gin, gives  no  hint  of  the  degree  of  "real"  cost,  but  only 
asserts  the  equality  ratio  between  the  utility  of  the  product 
and  the  forces  resisting  the  production,  whether  by  burden, 
or  by  utility  foregone,  or  by  both.  The  different  personal 
wages  or  profits  are  world-wide  from  the  correspondence 
of  remunerations  to  pains ;  it  is  a  commonplace  that  the 
dirtiest  and  the  most  disagreeable  occupations  pay  the 
least.^^ 

doctrine  gets  its  dues  ;  after  saying  on  page  427  :  "The  remainder  of 
the  present  volume  will  be  chiefly  occupied  with  interpreting  and  limit- 
ing the  doctrine  that  the  value  of  a  thing  tends  in  the  long  run  to 
measure  its  cost  of  production,"  he  calls  attention  to  the  fact  that  this 
is  not  precisely  to  say  that  it  tends  to  be  fixed  or  governed  by  its 
cost  of  production :  "We  might  as  reasonably  dispute  whether  it  is  the 
under  or  the  upper  blade  of  a  pair  of  scissors  that  cuts  a  piece  of  paper, 
as  whether  value  is  governed  by  utility  or  cost  of  production." 

But  this  is  not  inconsistent  with  the  view — for  the  most  part  held 
by  Marshall — that  the  two  margins  together  determine  the  price. 
But  in  a  note  on  page  580,  the  case  is  admirably  and  accurately  put 
as  follows :  "The  withdrawal  of  iron  from  any  one  of  its  necessary 
uses  would  have  just  the  same  influence  as  the  withdrawal  from  its 
marginal  use." 

"  Marshall,  op,  cit.,  p.  476. 

^'^  Ibid.,  pp.  430,  431  (5th  ed.,  pp.  351,  353). 

^'  Despite  the  fact  that  the  discussion  here  avowedly  concerns 
itself    not    with    the    laborer's    pains,    discomforts,    and    sacrifices,    but 


382 


VALUE  AND  DISTRIBUTION 


But  once  again,  what  about  the  entrepreneur's  services  as 
items  of  costs?    "In  calculating  the  outgoings,  the  head  of 

with  the  employer's  wage  expenditure — not  with  the  capitalist's  for- 
bearings  and  abstinences,  but  with  the  borrower's  outlay  of  hire, — the 
temptation  is  yet  almost  irresistible  to  investigate  the  causes  of  the 
facts,  to  set  afield  to  explain  what,  to  the  entrepreneur,  are  brute  and 
definitive  data,  but  which  are  evidently  world-distant  from  ultimate 
resting-places  for  thought.  Cairnes,  it  will  be  recalled,  was  so 
impressed  with  the  ultimate  character  of  human  life,  in  its  expression 
by  eff'ort  and  pain,  so  impressed  also  with  the  non-finality  and  non- 
reality  of  the  entrepreneur  point  of  view  and  computation,  that,  breaking 
with  Mill,  he  abandoned  it  entirely  as  a  significant  cost  category. 
Ricardo  had  based  entrepreneur  cost  upon  real  cost,  only  by  assuming — 
perhaps  as  self-evident,  but  at  any  rate  without  any  attempt  at  proof — 
the  proportionality  of  wage  outlays  to  labor  burdens  ;  and  as  to  the  pro- 
portionality of  interest  compensations  to  abstinence  claims  he  had 
greatly  worried,  but  had  on  the  whole  believed  the  divergence  not  hope- 
lessly wide.  Marshall  appears  to  follow  Ricardo  both  in  doctrine  and  in 
argumentative  method. 

But  if  the  costs  are  not  fixed  by  the  pains,  how  then  are  they  fixed? 
Pain  and  discomfort  and  ill  repute  have  obviously  something  to  do  with 
the  case,  even  admitting  that  they  have  not  all.  The  mind  will  not  rest 
contentedly  and  indefinitely  at  the  superficial  entrepreneur-cost  level  of 
explanation;  we  must  somewhere  turn  from  the  mere  opaque  liozv  much 
to  ask  the  why  of  the  how  much;  if  we  explain  value  by  the  value  of 
the  costs,  shall  we  not  somewhere  find  an  explanation  of  the  value  of 
the  costs?  And  if  nothing  else  offers,  shall  we  not  take  labor  pain 
as  explanation?  And  where  can  we  reach  bottom  unless  in  terms  of 
human  life  as  expressed  in  human  labor  and  in  human  pain? 

But  the  level  of  explanation  next  underlying  the  mere  entrepreneur 
quantum  is  the  level  at  which,  mainly,  opportunity  cost  offers  its  service  ; 
but  it  is  at  this  level  that  the  relative  pains  and  the  relative  pleasures 
and  remunerations  of  different  lines  of  activity  have  chiefly  to  be  con- 
sidered. How  great  a  supply  of  any  agent  may  be  had  in  any  industry 
or  under  any  entrepreneur,  and  on  what  terms  of  outlay,  is,  no  doubt, 
in  part  determined  by  the  relative  irksomeness  or  disagreeableness  or 
ill  repute  of  the  employment  in  question  ;  but  in  part,  also,  and  com- 
monly in  much  the  larger  part,  by  the  relative  remunerations  possible  in 
competing  industries  or  under  competing  employers.  That  is  to  say, 
the  seller  of  labor  efficiency,  like  the  land-  or  the  capital-owner,  com- 
putes his  refusal  price — in  part  or  entirely — according  to  what  may 
be  had  in  another  market  or  under  another  employer  in  the  same 
market. 

But  it  must  be  admitted  that  this  opportunity-cost  line  of  explana- 
tion, even  when  it  is  complete  in  its  inclusion  of  all  pain  and  pleasure 
and  product  aspects,  is  not  ultimate  ;  it  explains  some  values  merely  in 
the  light  of  competing  values ;  it  resolves  values  of  products  into 
values  of  costs.  But,  by  going  over  to  the  supply  of  instruments,  by  the 
adoption  of  the  standpoint  of  the  employee  rather  than  of  the  employer, 
it  is  so  far  better  than  the  mere  entrepreneur  point  of  view,  in  that 
it  does  in  some  measure  explain  the  entrepreneur  situation.  But  are  the 
values  of  the  costs  finally  and  adequately  explained  through  this  appeal 


ATTEMPT  AT  RECONCILIATION  3^3 

the  business  must  reckon  in  the  value  of  his  own  work,"  ^* 
but  there  is  no  suggestion  that  this  value  has  any  other  basis 
than  its  real  cost,  its  burden-pain  significance.  And,  in 
point  of  fact,  not  all  of  the  value  of  the  entrepreneur's 
services  can  be  computed  as  cost,  but  only  that  part  which 
represents  displacement,  the  opportunity  of  gain,  or  a 
recreation  or  other  pleasure  foregone, — the  most  desirable 
alternative ;  more  accurately,  the  amount  of  money  necessary, 
as  against  any  other  total  of  resistance  or  inducement,  to 
keep  him  at  the  production  in  question,  is  the  cost  volume 
in  question.  What  remains  over  and  above  this  necessary 
compensation,  the  surplus  called  unnecessary  profit  or  pro- 
ducer's quasi-rent,  is  no  part  of  cost.  And  it  is  surely  bad 
terminology  to  call  one's  own  work,  or  the  usance  value  of 
one's  own  property,  an  expenditure ;  but  this  is  not  a  serious 
matter.  Doubtless,  however,  Marshall,  like  Cairnes  and 
like  practically  all  other  economists,  appreciates  that  "the 
business  man  is  constantly  striving  so  to  modify  his  arrange- 
ments as  to  obtain  better  results  with  a  given  expenditure  or 
equal  results  with  a  less  expenditure ;"  ^^  and  that  individual 
effort  has  to  be  somehow  allowed  for  as  expenditure,  or  in 
some  other  way  and  to  some  extent  be  computed  in  cost.^® 
But  the  application  of  the  proposition  to  all  the  different 
outlays  obscures,  or  altogether  hides,  its  especially  impor- 
tant theoretical  aspects  as  applied  to  individual  effort. 
And,  as  we  have  already  had  occasion  to  observe,  this  doc- 
trine, if  consciously  held  and  thoroughly  worked  out,  is  the 
doctrine  of  opportunity  cost.^'^ 

to  the  employees'  competing  value  opportunities?  The  competing 
opportunities  are  themselves  also  value-derived  rather  than  value- 
explaining.  It  is  at  this  point  that,  as  ultimate  determinants,  the 
situation,  the  actually  controlling  conditions,  the  man-and-environment 
general  status  of  things,  assumes  its  place  as  ultimately  the  causal  fact. 

"Marshall,  op.  cit.,  p.  433  (sth  ed.,  p.  354). 

^^  Ibid.,  p.  433   (sth  ed.,  p.  355). 

"Flux  {Economic  Principles,  p.  52),  Seager  {Introduction  to 
Economics,  p.  157),  Fetter  {Principles  of  Economics,  p.  274),  and 
Seligman  {Principles  of  Economics,  p.  354)  all  adopt  this  extended 
sense  of  the  word  expense;  there  must  then,  it  seems,  be  some  advan- 
tage in  it  or  excuse  for  it  that  the  present  writer  has  not  appreciated. 

^^  Fetter,  Flux,  Seager,  Carver,  and  Seligman  all  recognize,  more 
or  less  consciously  and  completely,  this  opportunity-cost  aspect  of 
necessary  price. 

Fetter :      "The   entrepreneur's   cost  determines   the   lowest  price   at 


384  VALUE  AND  DISTRIBUTION 

On  page  449  (5th  ed.,  p.  377)  is  a  paragraph  which 
looks  somewhat  toward  the  opportunity-cost  doctrine. 
After  remarking  that  capital  (in  the  sense  of  the  entre- 
preneur concept)  goes  in  large  measure  toward  building 
up  internal  organization  and  trade  connections,  and  is  alto- 
gether lost  with  the  cessation  of  the  concern ;  and  that  one 
who  is  starting  a  new  business  must  reckon  upon  this 
chance  of  loss,  Marshall  says  that  a  man  of  normal  (aver- 
age?) capacity  may  fairly  expect  his  business  to  become 
representative  (.ayerage?  marginal?  price-determining?) 
with  its  fair  share  of  economies : 

If  the  net  earnings  of  such  a  representative  business  seem  likely 
to  be  greater  than  he  could  get  bj'  similar  investments  in  other 
trades,  he  will  choose  this  trade.    Thus  that  investment  of  capital  in 


which  he  can  continue  to  sell"  (p,  274).  However,  Fetter  also  says: 
''Alternative  cost  is  manifold  and  indefinite.  The  thought  is  significant 
at  the  moment  of  choice,  but  is  not  constantly  measurable  for  practical 
purposes.     Money  cost  is  the  practical  cost"   (p.  274). 

Flux:  "Supply  price  ....  must  be  a  price  sufficient  to  cover 
cost  of  production,  and  if  competition  be  vigorous,  the  excess  over  cost 
of  production  will  not  be  more  than  sufficient  to  afford  such  profits 
as  competitors  need  to  secure  in  order  to  continue  in  competition" 
(P-  57)  ;  which  says  that  necessary  supply  price  is  cost ;  but  that  each 
man  must  have  as  part  of  his  necessary  price  something  above  cost, 
namely,  what  his  competitors  find  to  be  a  part  of  their  necessary 
price ;  and  that  this  first  man's  necessary  excess  above  this  necessary 
price  is  his  profit. 

Seager :  "The  expenses  of  production  ....  include  minimum 
profits  to  the  entrepreneur  to  remunerate  him  for  his  time  and  trouble" 
(p.  157).  "The  amount  which  should  be  charged  as  wages  of  manage- 
ment or  minimum  profit  is  what  the  entrepreneur  could  obtain  for  his 
services  if  he  worked  for  wages  or  for  a  salary  for  a  corporation  or 
other  employer"   (p.  159). 

Seligman's  view  is  substantially  like  that  of  Seager:  "The  gross 
earnings  would  suffice  to  give  him  a  bare  compensation  for  his  services, 
for  otherwise  he  would  enter  into  some  other  employment  as  a  wage- 
earner"  (p.  354). 

But  why  assume,  for  example,  that  the  next  best  tune  that  any  man 
can  play  must  be  played  upon  someone's  else  violin? 

Carver:  "If  a  certain  individual  with  a  certain  amount  of  labor 
and  capital  at  his  disposal  can  earn  $1,000  a  year  by  working  for  other 
people  ....  a  piece  of  land  upon  which  he  with  his  capital  can 
produce  a  total  crop  worth  only  $1,000  would  be  worth  nothing  to  him, 
but  one  upon  which  he  could  produce  a  crop  worth  $1,200  would  be 
worth  approximately  $200  a  year." — Carver,  The  Distribution  of  Wealth, 
p.  188  (5th  ed.,  p.  377). 


ATTEMPT  AT  RECONCILIATION  385 

a  trade  on  which  the  price  of  the  commodity  produced  by  it  depends 
in  the  long  run,  is  governed  by  estimates  on  the  one  hand  of  the 
outgoings  required  to  build  up  and  to  work  a  representative  firm, 
and  on  the  other  of  the  incomings  spread  over  a  long  period  of 
time  to  be  got  by  such  a  price. 

This  comparison  is,  however,  of  alternatives  of  capital 
investment  rather  than  of  personal  remunerations ;  but  as 
applying  to  capital,  it  may  be  open  to  the  opportunity-cost 
interpretation.  Still,  strictly  interpreted,  the  passage  seems 
to  say  no  more  than  this,  that  the  long-run  price  depends 
on  the  proportion  between  the  expenses  on  the  one  side, 
against  incomings  on  the  other.  But  whether  the  passage 
really  covers,  or  is  intended  to  cover,  opportunity  cost, 
Marshall  makes  later  no  further  use  of  the  principle. 

KENT   AND   COST 

Marshall's  treatment  of  the  relations  of  rent  to  cost  is 
perhaps  the  least  satisfactory  portion  of  an  admittedly 
masterly  work. 

He  treats  both  extensive  and  intensive  margins — when 
both  are — as  equally  rentless  and  equally  price-determin- 
ing, without  apparent  wonder  that  the  costs  should  be  pre- 
cisely equal  in  the  two  cases,  both  nevertheless  being 
independent  causes,  and  there  existing  no  causal  nexus 
between  them :  "Rent  is  here  taken  as  another  name  for  the 
surplus  produce  which  is  in  excess  of  what  is  required  to 
remunerate  the  cultivator  for  his  capital  and  labor,"  ^* 

Bttt  this  statement  strictly  interpreted  would  carry  to 
the  landlord  as  land  rent  all  producer's  quasi-rents,  in  the 
sense  of  occupation  differentials.  And  even  though  this 
form  of  quasi-rent  receives  scant  recognition  from  Marshall, 
it  still  remains  to  ask  what  are  the  determinants  and  the 
measure  of  the  remuneration  required  by  the  cultivator  for 
his  capital  and  labor. 

These  doctrines  (that  the  price  ....  is  determined  by  the  ex- 
pense or  money  cost  ....  on  the  margin  of  cultivation;  and  that 
rent  does  not  enter  into  cost)  do  not  mean  that  a  tenant  farmer  need 

not  take  his  rent  into  account He  must  count  his  rent  in  just 

the  same  way  as  he  does  any  other  expense.    What  they  do  mean  is 

"  Marshall,  op.  cit.,  p.  477. 


386  VALUE  AND  DISTRIBUTION 

that  when  the  farmer  is  doubting  whether  it  is  worth  his  while  to 
apply  more  capital  and  labor  to  the  land,  then  he  need  not  think  of 
his  rent." 

But  this  argument  would  also  exclude  interest  wages 
and  profits  from  cost;  for,  as  Marshall  himself  points  out 
a  few  pages  later,  the  question  whether  one  shall  push  a 
piece  of  land  harder  or  shall  rent  more  land  "is  of  the  same 
kind  as  the  question  whether  he  shall  buy  a  new  plow,  or 
try  to  get  a  little  more  out  of  his  present  stock  of  plows." 
This  is  the  marginal  problem  with  plows;  this  marginal 
use  "pavs  nothing  net  toward  the  net  income  earned  by  the 
plow."  -° 

But  this  is  no  more  than  to  leave  cost  to  be  based  on 
something  other  than  payments  for  instrument  services ; 
and  this  would  lead  to  the  acceptance  of  wages  as  the  sole 
basis  of  marginal  cost.^^ 

In  point  of  fact,  all  that  this  doctrine  excluding  rent 
,  from  cost  amounts  to  is,  either  (i)  that  rent  applies  equally 
1  — if  at  all — to  all  the  different  costs  of  all  the  different  pro- 
1  ducers  in  any  given  line  of  production,  and  thereby  has  no 
i  relative  importance,  since,  as  much  as  cost  is  higher  or 
I  lower  in  rent,  it  is  correspondingly  modified  in  reverse 
''  order  with  regard  to  other  expenses  for  other  productive 
agents;  or,  (2)  that  when  rent  is  paid  there  is  a  corre- 
spondingly and  compensatingly  larger  product. 

"  Marshall,  op.  cit.,  p.  478. 
^  Ibid.,  p.  492. 

^^  "A  hop-grower,  for  instance,  may  find  that  on  account  of  the  high 
rent  which  he  pays  for  his  land,  the  price  of  his  hops  will  not  cover  the 
expense"   (p.  487). 

"Land  is  but  a  particular  form  of  capital  from  the  point  of  view 
of  the  individual.  The  question  whether  a  farmer  has  carried  the  culti- 
vation of  a  particular  piece  of  land  as  far  as  he  profitably  can  ;  and 
whether  he  should  try  to  force  more  from  it,  or  to  take  in  another 
piece  of  land,  is  of  the  same  kind  as  the  question  whether  he  should 
buy  a  new  plough,   or  try  to  get  a  little  more  work  out   of  his  present 

stock  of  ploughs He  weighs  the  net  product  of  a  little  more 

land   against  the  uses  to  which  he  could  put  the   capital   sum   that  he 

would  have  to  expend  in  order  to  obtain  it That  part  of  his 

produce  which  he  is  in  doubt  whether  to  raise  by  extra  use  of  his 
existing  ploughs,  or  by  introducing  a  new  plough,  may  be  said  to  be 
derived  from  the  marginal  use  of  the  plough.  It  pays  nothing 
net  ....  towards  the  net  income  earned  by  the  plough"  (p.  492) 
(5th  ed.,  p.  430). 


ATTEMPT  AT  RECONCILIATION  387 

But  whether  under   (i)    or  under    (2),  the  argument 
applies   as   only    within    a    given    line    of    production,    and 
thereby  can  have  no  significance  for  the  exchange  relations 
between  different  lines  of  commodities,  the  only  point  at 
which  any  application  can  have  any  real  significance;  for 
the  value  problem  is  something  more  serious  and  more  diffi- 
cult than  that  of  explaining  the  exchange  relations  of  one 
bushel  of  beans  or  of  wheat  with  another  precisely  like  it. 
And  what  about  capital  goods?     Marshall  points  out — and 
i  rightly — that  for  the  short-time  adjustment,  capital  goods 
I  bear  the  same  relation  to  price  as  does  land ;  the  quasi- 
I  rents  upon  capital  goods  are  no  more  a  cost  than  are  land  , 
rents,   since   in   the   short   run   the   supply   cannot   modify  / 
appreciably.     But  here  the  difficulty  is  that  wages  also  will, 
upon  this  reasoning,   fall  out  of  the  cost  category,  unless 
upon   the   assumption   of   a   computation   long   enough,    in 
point  of  time,   for  population  to  have  adapted  in  volume. 
And  even  then,  all  the  different  problems  as  to  the  relation 
/  between  the  supply  of  labor  and  the  remunerations  of  labor 
would  present  themselves. 

And  worked  out  to  its  logical  results,  this  rent-cost  doc- 
trine would  imply  that,  as  a  long-time  doctrine,  all  capital 
costs  would  finally  disappear;  for  each  producer  is  taken  as 
devising  and  contriving  how  best  to  use  his  labor  effective- 
ness in  view  of  his  abilities  and  of  the  environment  with  its 
opportunities,  all  conceived  as  means  toward  the  productive 
result  desired;  shall  it  be  this  or  that  capital,  or  more  or 
less  of  this  or  that?  All  costs  thus  resolve  themselves 
ultimately  into  labor  cost, — not  labor-purchase  or  labor- 
value  cost,  but  a  fragmentary  sort  of  labor-opportunity 
cost.  And  thus,  under  this  principle,  no  indestructible  fact, 
nor  the  compensation  for  any  indestructible  fact,  nor  any 
destructible  fact  for  the  term  and  the  measure  of  its  exist- 
ence without  upkeep,  could  figure  as  cost.  And,  finally, 
even  labor  could  rank  as  destructible  fact  and  its  wages 
thereby  function  as  cost,  only  under  a  reckoning  long 
enough  and  at  a  rate  of  compensation  low  enough,  if  such 
level  there  be,  so  that  laborers,  failing  to  receive  those 
necessary  compensations, — computed  according  to  some 
effective  standard  of  life,  or  according  to  some  minimum 
standard  of  subsistence, — should,  in  some  measure,  restrict 
their  total  nvimber  or  effectiveness. 

But  probably  no  one  would,  by  such  heroic  logic,  attempt 


388  VALUE  AND  DISTRIBUTION 

dxo  resolve  competitive  costs  into  any  such  ultimate  labor- 
opportunity  cost  as  this.  In  the  competitive  reckoning, 
any  given  entrepreneur  must  pay  to  his  labor  enough  not 
merely  to  keep  it  alive,  but  to  prevent  its  application,  under 
some  competitor,  to  the  purposes  of  this  competitor.  And 
this  appears  to  be  as  far  as  Marshall  has  thought  it  worth 
while  to  go.  But  this  is  an  opportunity-cost  analysis  in  the 
entrepreneur  computation,  which,  upon  the  chosen  level, 
calls  for  further  application ;  for,  under  this  reasoning, 
not  merely  the  creation  of  capital,  the  upkeep  of  capital, 
and  the  improvement  of  land,  but  also  the  upkeep  of  land 
must  be  computed  as  costs,  since  otherwise  the  greater 
profit  must  be  found  in  selling  out  the  land  piecemeal 
through  the  method  of  cropping  and  depriving  of  upkeep. 

But  if  opportunity  is  in  any  manner  or  degree  to  be 
recognized,  the  computation  can  hardly  stop  with  problems 
of  displacement  costs  related  solely  to  the  original  creation 
of  production  goods.  The  goods  being  once  in  existence, 
and  the  supply  of  them  being — by  assumption — incapable, 
for  a  period,  of  modification,  something  still  depends  on  the 
degree  of  their  specialization ;  and  this  applies  irrespective 
of  whether  the  goods  in  question  involved,  in  their  origin, 
any  labor  cost  of  production.  Land,  as  we  have  seen,  is,  in 
a  collectivist  economy,  the  basis  of  a  cost  to  the  extent  of  its 
best  alternative  application  ;  and  were  it  in  any  way  legiti- 
mate to  carry  over  this  computation  into  a  competitive  situa- 
tion, the  land  use  would,  to  this  extent  at  least,  function  as 
cost  in  the  competitive  reckoning.  In  neither  type  of 
organization  is  it  true  that  an  instrument  can  function  as  a 
cost  basis  only  after  it  has  imposed  a  cost  in  its  production. 
In  any  case,  it  is  a  cost  to  a  collectivist  society  according 
to  its  displaced  application ;  if  produced,  it  had  a  cost  under 
an  earlier  computation  of  displacement  according  to  what 
might  otherwise  have  been  produced, — or,  equally  well,  at 
the  margin,  a  combined  recreation-displacement  and  labor- 
pain  cost.  Under  entrepreneur-cost  computations,  each 
productive  fact  is  a  basis  of  cost  in  any  productive  use 
according  to  the  measure  of  what  it  costs  the  entrepreneur 
to  use  it  in  that  particular  way, — its  highest  displacement 
for  him,  whether  this  be  expressed  as  its  hire  or  as  some 
outranking  alternative  application. 

Thus,  if  Marshall's  attempt  to  exclude  produced  appli- 


ATTEMPT  AT  RECONCILIATION  389 

ances  or  their  hire  from  the  competitive-cost  reckoning 
were  approved,  the  reasoning,  logically  extended  to  apply  ^ 
to  labor  and  its  hire,  would  result  either  ( i )  in  admitting 
the  labor  as  cost  only  up  to  the  point  of  its  best  alternative 
of  productiveness,  or  (2)  admitting  the  wage  as  cost  only 
up  to  the  point  of  the  wages  obtainable  in  the  laborer's 
next  best  occupation,  or  (3)  in  denying  for  the  wage  outlay 
any  cost  significance  until  time  should  elapse  for  a  new 
generation  of  workers  to  come  upon  the  scene. 

The  classical  doctrine  may  be  restated  thus:  (i)  The  amount 
of  produce  raised,  and  therefore  the  position  of  the  margin  of  culti- 
vation ....  are  both  governed  by  the  general  conditions  of  demand 

and   supply (2)    But   rent   takes    no   part   in   controlling  the 

general  conditions  of  demand  and  supply  or  their  relations  to  one 
another.  It  is  governed  by  the  fertility  of  the  land,  the  price  of 
the  produce,  and  the  position  of  the  margin;  it  is  the  excess  of  the 
value  of  the  total  returns  which  capital  and  labor  applied  to  the 
land  do  obtain  over  those  which  they  would  have  obtained  under 
circumstances  as  unfavorable  as  those  on  the  margin  of  cultiva- 
tion.^ 

l^This  is  in  the  main  correct ;  rents  do  not  affect  price,  in 
any  ultimate  sense ;  but  the  supply  of  land  does,  and, 
through  the  prices  of  products,  affects  land  rents  and  land 
prices.]  So  of  wages  and  of  interest,  whether  capital  hire 
or  time  discount,  the  compensations  are  the  result  of  the 
value  contribution,  as  a  question  of  the  supply  of  agents 
and  of  the  resulting  products,  as  against  the  demand.  So 
the  fertility  of  the  non-marginal  lands  with  their  quantum 
of  product  has  much  to  do  with  the  location  of  the  margin. 
The  conditions  which  inake  rent  possible,  and  which  affect 
the  place  of  the  margin,  affect  price,  but  ultimately  speak-  y 

ing,  not  through  affecting  rents ;  rent  is  a  cause  only  as  the  .  ^^ 
entrepreneur  expression  of  the  relatively  limited  supply 
of  land  instruments :  the  sequence  is  really  the  other  way 
about.  But  rent  is  not  "governed  by  the  position  of  the 
margin,"  but  simply  reckoned  from  there ;  the  price  of  the 
product  is  the  proximate  cause,  but  is  itself  the  result  of  the 
whole  demand  for  product  over  against  the  whole  supply ; 
and  this  supply  volume  traces  back  to  the  land  supply  as 
one  of  its  causes.  The  causal  sequence,  in  a  competitive 
entrepreneur  economy,  runs,  demand  being  assumed,  from 

"Marshall,  op.  cit.,  p.  478    (5th  ed.,  p.  427). 


390  VALUE  AND  DISTRIBUTION 

supply  of  land  powers  to  the  products  of  these  powers, 
thence  to  price,  thence  to  rents,  and  thence,  under  the  time- 
discount  principle,  to  the  land  value.  [This  is,  indeed,  the 
sequence  with  all  productive  agents — supply  of  them,  sup- 
ply of  products,  price  of  products,  pay  of  agent.  Where, 
then,  is  the  justification  for  reckoning  any  form  of  agent 
remuneration  as  a  costT^  In  this,  that  to  the  individual 
seeking  his  most  favorable  application  of  his  gain-making 
possibilities,  all  marketable  agents  contributing  to  the  exist- 
ence of  things  of  value  are  the  basis  of  cost  hires ;  and 
these  cost  hires,  to  the  extent  that,  through  the  necessity 
of  them  as  outlays,  they  influence  the  individual's  choice  of 
occupations,  are  influences  bearing  as  costs  on  the  relative 
supply  of  products.  It  is  true  that,  as  bearing  upon  any 
individual's  productive  activity,  it  does  not  greatly  matter 
whether  he  employs  poor  land  at  little  rent,  or  better  land 
at  high  rent,  excepting  so  far  as  individual  capacity  or 
preference  may  play  some  part;  but  as  matter  of  capacity 
and  preference  it  does  somewhat  matter.  The  rent  pay- 
ment in  either  case  makes  a  part  of  actual  cost,  and  thereby 
forms  a  part  of  his  basis  of  comparison  of  the  costs  upon 
various  qualities  of  lands,  and  likewise  forms  a  part  of  the 
data  upon  which  his  choice  is  made  whether  he  shall  produce 
one  or  another  agricultural  product,  or  shall  produce  some 
non-agricultural  product  as  against  any  agricultural 
product.  FHis  cost  of  one  product  is,  in  the  main,  the  alter- 
native attractiveness  of  some  other  line  of  production,  as 
referred  to  the  test  of  highest  net  advantage.  It  is  by  this 
comparison  that  he  chooses  his  direction  of  activity,  and  in 
this  comparison  he  includes  his  rent  outlays,  precisely  as, 
to  arrive  at  the  highest  net  advantage  from  competing 
opportunities,  he  takes  account  of  outlays  in  wages,  capital 
hire,  time  discount,  taxes,  insurance,  royalties,  or  blackmail. 
'  In  short,  cost  of  production  is  a  matter  purely  of  the  indi- 
vidual psychology — a  complex  of  influences  combining  into 
the  one  problem,  a  purely  individual  problem,  of  how  the 
individual  in  question  shall  to  his  best  advantage  direct  and 
apply  the  gain-controlling  powers  and  agents  in  his  controTj 

But  all  of  these  cost  outlays  trace  back,  for  their 
causation,  to  the  conditions  of  supply  of  the  respect- 
ive agents  in  view  of  the  opportunities  for  their 
application,    which    agents    receive    their    market    values, 


ATTEMPT  AT  RECONCILIATION  39^ 

their  prices,  through  the  competition  of  the  differ- 
ent producers,  inclusive  of  the  producer  especially 
under  consideration.  These  market  prices,  socially 
established,  stand  to  the  individual  producer  as  items  of 
cost  and  as  data,  among  other  data,  in  view  of  which  his 
choice  of  gainful  activity  is  made.  That  is  to  say,  it  is  by 
the  intermediary  of  individual  relative  costs  and  of  the 
resulting  choices  of  activity,  that  conditions  of  supply 
among  productive  agents  make  themselves  felt  in  the  rela- 
tive supplies  of  products,  and  thereby  in  the  value  of 
products,  which  value  is  reflected  back  upon  the  agents. 
Thus  it  is  the  limitation  of_the  supply  of  agents- — land, 
foF"BraiTTpTe^^and  not  the  reiiiuneration  tfiat  is,  on  the  cost 
side,  the  ultimate  explanation  of  the  value  relations  of 
products.  Cost  of  production,  in  the  competitive  sense, 
applies  here  only  to  the  sphere  of  individual  activity,  as 
tracing  out,  through  the  the  individual's  choice  of  activity, 
the  influence  of  the  supplies  of  agents  upon  the  relative 
supplies  of  goods.  As  individual  costs,  all  sorts  of  influ- 
ences enter,  including  every  kind  of  outlay,  but  the  leading 
influence,  by  virtue  of  which  producers  become  marginal,  is 
opportunity  cost,  the  attractive  influence  of  other  industries.^' 

And  all  of  this  receives  occasional  recognition  from 
Marshall : 

The  rise  of  ground  rents  in  the  district  will  thus  be  an  indica- 
tion of  the  scarcity  of  space  which,  other  things  being  equal,  will 
raise  the  price  of  retail  goods;  just  in  the  same  way  as  the  rise  of 
agricultural  rents  in  any  district  will  indicate  a  scarcity  of  land 
which  will  raise  the  marginal  expenses  of  production,  and  therefore 
the  price  of  any  particular  crop.^* 

The  cost  of  production  of  the  marginal  [agricultural]  produce 
can  be  ascertained  zvithout  reasoning  in  a  circle.  The  costs  of  pro- 
duction of  other  parts  of  the  produce  cannot.  The  cost  of  produc- 
tion on  the  margin  of  the  profitable  application  of  capital  and  labor 
is  that  to  which  the  price  of  the  whole  produce  tends,  under  the  con- 
trol of  the  general  conditions  of  demand  and  supply.^ 

^'  Of  course,  in  the  broader  sense  of  the  word,  all  alternatives  of 
recreation  or  of  rest  or  of  avoidance  of  pain  could  be  ranged  under  the 
opportunity-cost  concept. 

^Marshall,  op.  cit.,  p.  488   (5th  ed.,  p.  452). 

''^  Ibid.,  p.  479   (5th  ed.,  p.  428). 


392  VALUE  AND  DISTRIBUTION 

Put  iauother  words  the  argument  seems  to  run  as 
follows:  ^P^ice  is  used  to  explain  rent;  therefore,  if  price 
is  the  resull  of  cost,  only  that  cost  in  which  rent  does  not 
figure  can  be  used  to  explain  price.  And  so  it  should,  then, 
follow,  one  infers,  that  if  the  selling-price  of  products 
explains  wages,  wages  cannot  be  used  as  costs  to  explain 
price.  And  all  this  w^ould  be  true  if  land  differentials  or 
labor  remunerations  were  worked  out  from  the  isolated  or 
collectivist  point  of  view,  instead  of  being  a  competitive 
adjustment  of  the  value  of  the  instrument  or  agent;  but  to 
the  individual  the  rent  is  a  datum,  a  fixed,  opaque  fact  of 
cost,  and  is  not  a  thing  which  he  determines  according  to  the 
price ;  and  precisely  the  same  reasoning  holds  with  regard 
to  his  wage  or  hire  or  time-discount  outlays ;  what  is,  for 
market  purposes,  for  aggregate  movements,  a  fact  of  dis- 
tribution, a  value  derivative  and  imputation,  is  to  him  a 
fact  of  cost.  His  acts  are  results  from  the  value  situation 
which  he  faces  and  out  of  which  as  opportunity  he  derives 
his  remunerations.  That  he  and  his  costs  and  his  decisions 
and  his  derivative  productive  activities  are  in  turn  and  in 
their  small  degree  reacting  causes,  he  does  not  commonly 
appreciate  or  need  to  appreciate. 

So  far  we  have  treated  agricultural  produce  as  a  single  com- 
modity  But    now    we    have    to    reckon    for    the    competition 

between  the  different  kinds  of  agricultural  produce  for  the  use  of 
fertile  soils Each  crop  strives  against  others  for  the  posses- 
sion of  the  land;  if  any  one  crop  shows  signs  of  being  more 
remunerative  than  before,  relatively  to  others,  the  cultivators  will 
devote  more  of  their  land  and  resources  to  it Thus  in  equilib- 
rium, oats  and  hops  and  every  other  crop  will  yield  the  same  net 
return  to  that  outlay  of  capital  and  labor  which  the  cultivator  is 
only  just  induced  to  apply.  That  "marginal"  application  which  only 
just  pays  its  expenses,  and  which  therefore  contributes  nothing  to 
rent,  will  yield  equal  net  returns  to  the  cultivator.  For  otherwise 
....  it  would  still  be  open  to  him  to  increase  his  gains  by  redis- 
tributing his  crops The  margin  of  cultivation  has  now  to  be 

described  as  the  margin  of  the  profitable  application  of  capital  and 
labor  to  all  land  which  the  competition  of  other  crops  yields  to 
oats." 

This  discussion  therefore  abandons  cost  at  all  but  the 
intensive  margin;  there  is,  in  this  sort  of  cases,  no  extensive 

"Marshall,  op.  cit.,  pp.  480,  481    (5th  ed.,  pp.  434,  435). 


ATTEMPT  AT  RECONCILIATION  393 

margin;  the  most  unfavorable  conditions  of  fertility  chosen 
for  oats  are,  it  is  rightly  argued,  somewhat  affected  by  the 
fact  that,  for  the  land  that  is  capable  of  growing  oats, 

there  is  so  great  a  demand  for  other  purposes  that  it  affords  a 
higher  rent,  when  used  for  them,  than  when  used  for  growing  oats ; 
....  land  which  would  yield  a  good  rent  under  them,  but  which 
yields  a  better  rent  under  other  crops.  It  is  still  true  that  rent  is 
not  an  element  in  those  expenses  of  production  of  marginal  oats, 

to   which   the  price   of   the   whole   conforms Jevons    asks 

(Preface  to  Theory  of  Political  Economy,  p.  liv),  "If  land  which 
has  been  yielding  £2  per  acre  rent,  as  pasture,  be  ploughed  up  and 
used  for  raising  wheat,  must  not  the  I2  per  acre  be  debited  against 
the  expenses  of  production  of  wheat?"  The  answer  is  in  the  nega- 
tive. For  there  is  no  connection  between  this  particular  sum  of  £2 
and  the  expenses  of  production  of  that  wheat  which  only  just  pays 

its  way When  land  capable  of  being  used   for    raising  one 

commodity  is  used  for  producing  another,  the  price  of  the  first  is 
raised  by  the  consequent  limitation  of  its  field  of  production,^^ 

but  not,  Alarshall  rightly  insists,  by  the  rent  payment, — that 
is,  not  in  the  sense  of  ultimate  cause.  The  cost  price, 
Marshall  argues,  is  the  cost  at  the  intensive  margin,  and 
this  margin  is  at  a  poorer  level  of  land  because  of  the  use 
of  the  land  for  other  things.  And  in  any  event,  it  is  rightly 
urged,  the  rent,  if  it  figures  as  cost  at  all,  must  figure  not 
by  what  would  have  been  paid  if  less  had  been  paid,  but 
by  the  actual  amount  that  is  paid. 

It  must  be  admitted  that  to  show  that  rent  enters  into 
the  individual's  computation  of  cost  is  not  to  prove  that  it 
enters  into  the  cost  of  the  marginal  product;  and  it  is  pre- 
cisely here  that  Marshall  takes  his  stand  in  the  denial  that 
rent  is  a  part  of  cost-determining  price.  But  by  the  same 
argument  it  can  be  shown  that  no  cost  enters  into  price- 
determining  costs:  "The  amount  of  every  item  but  one 
can  be  increased,  and  another  unit  of  product  be  procured 
without  any  addition  to  the  cost  of  that  one  item"  (Fetter). 
And,  really,  it  is  not  true  that  the  item  of  product  raised  on 
rent-paying  land  is  farther  away  from  the  margin  of  indi- 
vidual production,  costs  less,  than  the  item  produced  upon 
non-rent-paying  land ;  nor  is  it  true  that  the  item  upon  the 
intensive  margin  costs  more  than  the  item  requiring  less 

"  Marshall,  op.  cit.,   pp.  482,  483    (sth  ed.,  p.  437). 


394  VALUE  AND  DISTRIBUTION 

expense  for  capital  goods  and  for  labor.  And  it  is  not  true 
that  marginal  cost  controls  or  determines  market  value,  or 
that  the  marginal  item  has  any  otljer  or  greater  effect  upon 
value  than  any  other  item,  ^rice  is  fixed  at  mar- 
ginal cost  and  not  by  marginal  cost ;  it  is  the  whole  demand 
and  the  whole  supply  which  equate  at  price ;  and  in  any 
case,  the  margin  is  always  a  personal  margin,  and  not  an 
instrument  margin, — or  only  derivatively.  In  the  competi- 
tive reckoning,  the  quantum  of  necessary  remuneration  for 
the  entrepreneur's  displacements  and  sacrifices  is  irrelevant 
to  the  question  of  whether  the  land  is  marginal  or  not; 
these  costs  are  as  likely  to  be  upon  supra-marginal  as  upon 
marginal  land,  and  away  from  the  intensive  margin  as 
upon  it.  It  does  not  matter,  that  is,  whether  the  land  is 
good  at  high  rent  or  poor  at  correspondingly  low  rent ;  and 
this  again  is  equally  true  of  capital  goods  or  of  labor. 
Nor,  as  a  matter  of  individual  cost — and  here  Marshall  is 
clearly  right — is  it  at  all  essential  that  the  land  have  an 
alternative  utility;  it  has,  at  all  events,  a  value  to  other 
producers ;  the  owner  could  rent  it  or  sell  it ;  the  tenant's 
outlay  for  it  is  for  him  a  displacement  of  other  production, 
or,  at  least,  of  consumption ;  in  some  sense,  narrower  or 
broader,  it  is  then  an  opportunity  cost. 

But  two  or  three  pages  farther  on  we  find  the  follow- 
ing: 

This  argument  does  not  imply  that  a  manufacturer  when  making 
up  the  profit-and-loss  account  of  his  business  would  not  count  his 

rent  among  his  expenses For  he  may  think  that  the  saving 

in  ground  rent  that  he  will  make  by  moving  into  the  country,  to- 
gether with  other  advantages  of  the  change  will  more  than  counter- 
balance its  disadvantages.  In  a  discussion  as  to  whether  it  was 
worth  while  to  do   so,  the  ground   rent  of   his    factory  would  be 

reckoned  among  the  expenses  of  his  cloth It  is  no  less  true 

that  in  making  up  the  profit-and-loss  account  of  the  cultivation  of 
land,  the  farmer's  rent  must  be  reckoned  as  among  his  expenses.^  A 
hop-grower,  for  instance,  may  find  that  on  account  of  the  high  rent 
that  he  pays  for  his  land,  the  price  of  his  hops  will  not  cover  the 
expenses  of  their  production  where  he  is,  and  he  may  abandon  hop- 
growing,  or  seek  other  land  for  it.  [And  the  land  may  then  go  to 
a  market-gardener,  who  in  turn  hard-pressed  by  his  rents]  in  his 
turn  makes  room  for,  say,  a  building  company  (Marshall,  op.  cit., 
pp.  486,  487)    (5th  ed.,  p.   450). 

It  is  thus  difficult  to  make  out  what  is  meant  by  saying 


ATTEMPT  AT  RECONCILIATION  395 

that,  in  its  effect  to  make  the  producer  marginal,  rent  is  not  ' 
as  much  an  influence  as  any  other  cost.  True,  it  is 
really  the  superior  pull  of  market-gardening  which  takes 
the  land  from  hops  and  diminishes  the  supply  of  hops ; 
but  precisely  parallel  is  the  case  with  labor  or  with  capital 
goods ;  this  pull  gets  expression  through  the  competitive 
fixation  of  costs.  The  advantages  of  market-gardening 
outrank  those  of  hop-culture ;  the  rent  is  competitively  fixed 
at  a  level  to  which  the  cultivation  of  hops  cannot  adjust 
itself. 

QUASI-RENTS   AND   COSTS 

Marshall's  doctrine  of  quasi-rents,  as  indicating  the 
returns  upon  capital  instruments,  while  important  and  even 
epoch-making  in  the  development  of  economic  theory,  is 
especially  disastrous  to  the  other  portions  of  his  theoretical 
structure.  As  we  have  seen,  the  doctrine  is,  in  substance, 
that,  for  ^ort-time  purposes,  capital  goods  receive  an 
income  of  the  same  sort  as  that  of. land, — not  as  a  cost,  a 
price-determining  factj^Jbut.as  price-determined. 

DFviousiy,  this  is  a  view  of  cost,  perhaps  not  precisely 
collectivist  in  standpoint,  but  at  all  events  regarding  cost 
from  some  other  point  of  view  than  that  of  the  entre- 
preneur-producer of  the  finished  commodity.  Like  Cairnes, 
who  approached  cost,  not  in  the  conviction  that  "the  easiest 
as  well  as  the  most  practical  course  is  to  go  straight  to  pro- 
duction for  sale  in  a  market,"  but  in  the  conviction  that  not 
what  the  employer  pays  for  the  labor,  but  the  laborer's 
own  discomfort  in  grief  and  groan,  is  the  sense  in  which 
cost  has  to  do  with  value,  Marshall  now  goes  over  for  his 
cost  computation  to  the  point  of  view  of  the  producer  of 
the  capital  rather  than  that  of  the  borrowing  entrepreneur. 
That  is  to  say,  Marshall  holds  that,  as  a  long-time  doctrine, 
improvements  upon  land  and  capital  goods  conform  in 
their  value  to  the  law  of  costs ;  the  making  of  them  depends 
upon  the  prospect  of  the  compensation  to  be  had;  in  the 
long  run,  therefore,  the  cost  value  of  the  instrument  must 
stand  as  a  price-determining  cost  in  its  relation  to  the 
derived  consumption  good;  but  for  short  periods  the  capi- 


396  VALUE  AND  DISTRIBUTION 

tal  good  receives  compensation  parallel  to  that  of  land  and 
is  price-determined. 

Perhaps  one  might  object  that  it  is  the  very  gist  of  the 
long-time  doctrine  that  the  compensation  even  then  is  price- 
determined;  but  the  long-time  adjustment  clearly  gives  time 
for  cost  influences  to  make  themselves  effective  in  the 
supply  of  instruments.  'The  real  difficulty  is,  however,  that 
Marshall  has  changed  his  point  of  view ;  he  is  now  discuss- 
ing the  ultimate  determinants  of  the  costs,  rather  than  the 
costs  as  they  present  themselves  to  the  entrepreneur;  for 
it  is  true,  as  Marshall  himself  says,  that  the  entrepreneur 
cares  little  for  real  costs ;  his  point  of  view  has  no  concern, 
as  a  cost  computation,  with  the  deeper  and  more  far-reach- 
ing questions  of  the  processes  and  influences  through  which 
the  costs  have  come  to  be  as  they  are, — the  underlying  and 
directive  situation  facts  and  the  past  adjustments  within 
this  general  situation.  For  the  entrepreneur,  whatever  he 
has  to  pay  for  a  productive  fact  is  the  cost  of  ij^ 

But  even  admitting  the  validity  of  Marshall's  reasoning, 
— and  for  certain  purposes,  not  entrepreneur  purposes,  its 
validity  is  beyond  question, — we  have  again  to  ask  whether 
wages  are  not  paid  upon  precisely  the  same  basis,  and  are 
not  therefore,  in  the  short-time  view,  equally  quasi-rents, 
and  eqvially  to  be  excluded  from  value  determination.  And, 
in  view  of  the  possibility  of  wearing  out  almost  any  sort  of 
land,  the  possibility  also,  with  sufficient  applications  of  capi- 
tal, of  producing  almost  any  sort  of  land,  and  the  necessity 
of  constant  capital  applications  in  the  way  of  land  upkeep, 
does  not  this  cost  doctrine  apply,  in  the  long-time  view, 
equally  to  land? 

But  no  one  more  strongly  than  the  ultra-modern  oppo- 
nent of  classical  doctrine  would  insist  upon  this  quasi-rent 
principle.  It  ai)plies  to  all  agents ;  the  seeming  of  price 
determination  by  the  hire  of  the  productive  fact  is  merely 
an  aspect  of  the  entrepreneur  process.  And  so  it  is  true, 
as  Marshall  points  out,  that,  irrespective  of  past  costs,  there 
may  be  machines  barely  worth  using  and  thereby  giving  no 
surplus  of  any  sort,  and  that  the  value  of  other  appliances 
is  in  the  nature  of  a  differential  measured  from  this  value- 
less-capital margin.-*  But  it  is  equally  clear  that  there  is, 
in  this  sense,  for  labor  a  wage  differential  measured  from 

^  Marshall,  op.  cit,,  p.  494. 


ATTEMPT  AT  RECONCILIATION  397 

idleness  or  from  total  inefficiency,  and  that  all  remunera- 
tions are  the  expression  of  a  market  value  in  the  agent  just 
that  much  greater  than  nothing.""-' 

So,  at  all  events  from  the  point  of  view  of  the  indi- 
vidual, Marshall  seems  to  admit  that  there  is  no  better 
reason  for  excluding  rent  than  interest  from  cost.  But 
"from  the  point  of  view  of  society,"  he  sees  a  difference. 
"Land  is  a  fixed  stock  for  all  time,"  ^"  while  capital  is  within 
control  and  is  elastic.  But  while  this  is  true  in  a  loose  way, 
— that  is,  it  is  true  that  the  land  supply  has  not  the  same  de- 
gree of  elasticity  as  most  other  capital  goods, — this  has  no 
significance  for  the  cost  doctrine  of  any  particular  situa- 
tion, for  the  analysis  of  the  value  adjustment  taken  for  a 
cross-section  of  society,  though  it  may  point  to  changes 
later  to  take  place  in  some  of  the  elements  of  costs,  and  so 
may  foretell  important  modifications  of  the  terms  under 
which  at  a  later  time  the  value  problem  will  have  to  be 
worked  out. 

And  so,  while  Marshall  admits  that  "the  hire  of  a  pony 
is  the  excess  of  its  value  over  the  hire  of  a  pony  which  is 
so  weak  as  to  have  no  hiring- value  at  all ;  the  hire  of 
ponies,  like  that  of  land,  is  governed  by  the  value  of  the 
services  they  will  render,"  ^^  he  regards  this  as  only  for  the 
time ;  in  the  long  run,  the  value  of  the  ponies  will  be  modi- 
fied as  cost  influences  make  themselves  felt  through  the 
changing  supply  of  ponies.  Ponies  as  a  rule  will  yield  no 
surplus  above  normal  profits ;  not  so  with  land. 

But  note  that  Marshall's  position  is,  after  all,  that  it  is 
not  so  much  so  with  land ;  for  he  says  at  the  bottom  of  the 

^  "The  earnings  of  every  kind  of  capital  goods  can  be  brought 
into  the  form  of  surpluses,  or  differential  quantities The  posi- 
tive power  of  each  bit  of  land  to  create  wealth  fixes  the  rent  of  it,  just 
as  the  positive  power  of  each  vinit  of  capital  to  create  wealth  fixes 
the  value  of  it.  The  lowest  grade  of  every  instrument  produces  nothing, 
and  is  a  no-rent  article.  Higher  grades  of  every  instrument,  land 
included,  produce  something  ;  and  if  there  is  any  advantage  in  calculat- 
ing the  amount  of  that  something  by  saying  that  it  is  a  product  of  the 
good  instrument  minus  the  product  of  the  poorest  one,  that  calculation 
will  always  yield  a  correct  result,  since  the  product  of  the  poorest  one 

is   nothing All    wages   are   rents   of   labor "      (Clark, 

The  Distribution  of  Wealth,  p.  346.) 

^Marshall,  op.  cit.,  p.  493   (sth  ed.,  p.  431). 

"  Ibid.,  p.  494. 


39^  VALUE  AND  DISTRIBUTION 

same  page:  'The  supply  of  fertile  land  cannot  be  adapted 
quickly  to  the  demand  for  it,  and  therefore  the  income 
derived  from  it  may  diverge  permanently  much  from  the 
normal  profits  on  the  cost  of  preparing  it  for  cultivation ;" 
which  leaves  the  distinction  between  interest  and  rent  in 
their  relation  to  cost  one  of  degree  only,  and  not  of  funda- 
mental significance,  and  leaves  labor  and  wages  to  be 
assimilated,  for  cost  purposes,  rather  to  land  and  rent  than 
to  capital  and  interest. 

But  nevertheless  there  are  differences  to  be  taken  into 
account  between  long  and  short  periods  with  regard  to  the 
adaptability  of  supplies  of  agents  through  the  mechanism  of 
costs.  But,  however  and  whenever  the  entrepreneur  hires 
his  appliances,  the  rent  paid  by  him  is  the  market  value  of 
the  agent's  service;  and  dear  or  cheap,  his  payments  are 
costs  to  him.  And  thus,  what  Marshall  formulates  as  true 
only  of  the  long  run,  is  really  true  for  every  case:  "The 
income  that  is  derived  from  capital  in  this  form  [specialized 
capital  goods]  enters  into  the  payments  by  which  the 
expenses  of  production  of  the  commodity  in  question  have 
to  be  covered."  ^- 

And  Marshall  asserts  that,  in  a  stationary  state  of 
society,  the  income  of  any  appliance,  being  correctly  antici- 
pated beforehand,  would  accurately  correspond  to  its  cost, 
and  thus 

the  aggregate  expenses  of  production  might  then  be  found  either 
by  multiplying  these  marginal  expenses  by  the  number  of  units  of 
the  commodity;  or  by  adding  together  all  the  actual  expenses  of 
production  of  its  several  parts,  and  adding  in  all  the  rents  earned 
by  differential  advantages   for  production.^' 

Notwithstanding  that  this  is  a  statical  analysis,  it  never- 
theless seems  to  abandon  all  that  has  gone  before. 

The  difficulty  suggested  a  page  or  two  back,  that, 
according  to  Marshall's  reasoning,  wages  should  be 
regarded  as  in  the  nature  of  a  rent  or  of  a  quasi-rent,  and 
as  such  should  be  dropped  from  his  cost  computation,  or  at 
all  events  from  the  short-time  form  of  it,  requires  some 
further  consideration. 

'*  Marshall,  op.  cit.,  p.  495. 

^  Ibid.,  p.  520  (sth  ed„  p,  810), 


ATTEMPT  AT  RECONCILIATION  399 

In  Book  VI,  chap,  v,  Marshall  discusses  the  "so-called 
rent  of  labor,"  and  regards  this  as  "the  question  under 
what  head  to  class  those  extra  incomes  which  are  earned  by 
extraordinary  abilities."  Whether  or  not  he  is  justified  in 
his  assertion  that  "this  analogy  is  valid  and  useful  so  long 
as  we  are  merely  analyzing  the  component  parts  of  the 
income  earned  by  an  individual,"  it  is  for  his  purposes 
safe  to  say  that  "we  are  not  at  liberty  to  treat  the  excep- 
tionally high  earnings  of  successful  men  as  rent,  without 
making  allowance  for  the  low  earnings  of  those  who  fail ;" 
for  it  must  be  remarked  that  he  is  discussing  the  influences 
which  restrict  or  recruit  the  labor  supply  for  any  particular 
line  of  activity:  "for  the  supply  of  labor  in  any  occupation 
is  governed,  other  things  being  equal,  by  the  earnings  of 
which  it  holds  out  the  prospect."  With  these  remunera- 
tions in  view,  the  youth  and  his  parents,  in  selecting  his 
occupation,  "are  very  far  from  leaving  out  of  account 
the  fortunes  of  successful  men.  These  fortunes  are  there- 
fore part  of  the  price  that  is  paid  in  the  long  run  for 
the  supply  of  labor  and  ability  that  seeks  the  occupation; 
they  enter  into  the  true  or  'long-period'  normal  supply 
•  price  of  labor  in  it."  But  in  the  short  run,  these  extra 
incomes  are  rents — "do  not  enter  directly  into  the  marginal 
expenses  of  production  of  the  goods,  nor  therefore  into 
their  price;  they  are  governed  by  that  price,  and  there- 
fore are  rather  to  be  regarded  as  a  quasi-rent.  But  the 
same  is  true  of  the  special  net  return  of  acquired  skill." 
Doubtless  wages  are  a  rent  in  the  sense  of  an  efficiency 
remuneration;  but  in  this  sense,  there  is  no  justification  for 
taking  anything  but  absolute  inefficiency  as  a  margin.  In 
Marshall's  view,  however,  of  the  return  upon  acquired 
skill,  the  idea  is  one  of  the  investment  of  capital,  the  effi- 
ciency out  of  which  the  rent  arises  being  regarded  as  an 
addition  to  the  native  endowment.  But  Marshall  elsewhere 
points  out  that 

when  an  artisan  or  a  professional  man  has  exceptional  natural 
abilities,  which  are  not  made  by  human  effort,  and  are  not  the  result 
of  sacrifices  undergone  for  a  future  gain,  they  enable  him  to  obtain 


400  VALUE  AND  DISTRIBUTION 

a  surplus  income  over  what  ordinary  persons  could  expect  from 
similar  exertions  following  on  similar  investments  of  capital  and 
labor  in  their  education  and  start  in  life;  a  surplus  which  is  of  the 
nature  of  a  rent.^* 

But  notice  that  now  the  idea  is  of  a  margin  measured 
somehow  from  the  basis  of  ordinary  persons,  while  before 
it  was  a  differential  by  addition  to  original  power.  But 
why  should  not  remuneration  for  any  ability  possessed 
without  cost  be  regarded  as,  in  its  entirety,  a  rent?  And 
what  have  ordinary  people  to  do  with  the  case?  And 
ordinary  in  what  grade  of  people  or  line  of  occupation? 
Walker',  we  recall,  in  his  doctrine  of  entrepreneur  rent, 
found  his  marginal  man  in  the  same  line  of  production, 
though  one  does  not  readily  see  why,  or  why  not,  and  denied 
that  the  differential  profits,  so  measured,  made  any  part  of 
price-determining  cost:  "So  his  doctrine  would  appear  to 
mean  only  that  that  part  of  the  employer's  income  which  is 
due  to  exceptional  abilities  or  good  fortune  does  not  enter 
into  price ;"  ^^  in  all  of  which  Marshall  appears  to  concur, 
excepting  with  the  reservation  that  cost  must  include  the 
blanks  if  it  includes  the  prizes:  "The  argument,  in  so  far 
as  it  is  valid,  applies  to  the  'rare  ability'  of  the  earnings 
of  all  kinds  of  labor  as  much  as  of  earnings  of  manage- 
ment." =<« 


''*  Marshall,  op.  cit.,  p.  704  (5th  ed.,  p.  621). 

^ Ibid.,  p.  705,  n,   (5th  ed.,  p.  625,  n.). 

^  Ibid.,  p.  705,  n.  (5th  ed.,  p.  624,  n.). 

Macfarlane  {Value  and  Distribution)  accepts  the  notion  of  quasi- 
rents  in  wages,  regards  these  quasi-rents  as  price-determined,  and 
interprets  them  not  as  differentials  of  advantage  in  favor  of  the 
chosen  employment  as  against  the  next  best  alternative,  but  as  a  differ- 
ential in  favor  of  one  employment  as  against  another  (p.  311).  But 
merely  as  higher  remuneration  for  higher  efficiency  there  is  no  room 
for  a  distinction  as  far  as  costs  are  concerned.  And  as  Macfarlane's 
acceptance  of  Walker's  notion  of  entrepreneur  differentials  is  unfor- 
tunate, so  likewise  must  be  regretted,  not  the  unwillingness  to  accept 
the  term  profit  as  applying  to  this  differential,  but  the  reason  for  this 
unwillingness,  viz.,  that  Walker's  terminology  breaks  with  the  alleged 
tradition  that  profit,  in  whatever  variety  of  meanings,  is  constant  in  one 
characteristic,  that  is  always  a  part  of  cost  (p.  135).  But  surely  there 
is  no  complete  consensus  of  opinion  here ;  for  example.  Mill  some- 
times, and  Hadley  always,  are  to  the  other  effect ;  and,  as  we  have  seen, 
the  truth  appears  to  be  that  profit  distributes  into  cost  and  non-cost 
elements,  into  necessary  and  uimecessary  profit. 


ATTEMPT  AT  RECONCILIATION  401 

But  aside  from  the  fact  that  Marshall's  doctrine  is  with- 
in the  field,  not  of  entrepreneur  costs,  but  of 
the  conditions  underlying  and  determining  these  costs, 
it  is  to  be  said  that  the  whole  argument  miscon- 
ceives the  nature  of  marginality  in  choice  of  occupa- 
tions. A  man  making  $5,000  a  year  may  as  well  be  mar- 
ginal as  one  making  barely  what  he  could  command  as 
wage-earner.''' 

^'  Quasi-rents  and  costs. — In  view  of  the  principle  that 
all  competing  producers,  no  matter  what  productive  agents  they  may 
hire,  must  pay  for  the  services  obtained  the  market  value  of  these 
services,  it  is  difficult  at  first  thought  to  see  even  a  remote  justification 
for  the  notion  that  rent  does  not  enter  into  the  determination  of  price. 
If  there  is  any  distinction  possible  here  between  land  on  the  one  side 
and  labor  and  capital  on  the  other,  it  must  be  that  the  labor  or  the 
capital  will  go,  not  merely  to  another  producer,  if  it  is  not  paid  a 
satisfactory  rate  by  the  producer  in  question,  but  will  go  into  another 
industry  if  not  paid  an  adequate  rate  in  this  one.  But  this  holds 
equally  with  lands ;  most  land  is  less  specialized  than  most  capital 
goods  and  than  most  forms  of  skilled  labor.  From  the  displacement 
point  of  view,  therefore,  whether  in  the  competitive  or  the  collectivist 
computation,  land  is  as  rightly  a  basis  of  cost  as  is  capital  or  labor. 

But  in  the  degree  that  any  agent,  whether  land,  labor,  or  capital, 
is  specialized  in  its  adaptations,  there  remains  something  to  be  said  for 
the  rent-cost  doctrine  from  the  point  of  view  of  a  collectivist  society. 
And  even  in  a  competitive  economy,  may  it  not  be  true  that,  viewed 
in  the  large  as  a  question  of  society  in  the  aggregate,  such  part  of  the 
com_pensation  of  any  productive  agent  as  is  more  than  that  agent  could 
earn  elsewhere,  such  part  as  is  purely  an  employment  or  occupation 
differential,  is  a  price-determined  and  not  a  price-determining  charge? 
But  it  is  well  to  see  that  if  such  is  the  truth,  the  doctrine  goes  dis- 
turbingly far.  For  almost  all  productive  agents  are  specialized  in  some 
degree  ;  there  is  in  most  cases  a  differential  in  favor  of  the  current  and 
actual  employment :  the  alternative  use  represents,  as  a  value  displace- 
ment, an  appreciably  smaller  sum  of  value.  Put  in  other  terms,  most 
incomes,  regarded  from  the  point  of  vietv  of  the  income-receivers,  are 
greater  as  incomes  than  as  costs.  These  quasi-rent  quantities  attach 
with  many  forms  of  intermediate  goods,  with  most  machinery,  and  with 
by  far  the  larger  share  of  labor  agents.  The  doctrine  holds  true  not  of 
land  alone,  but,  to  an  even  greater  degree,  of  much  capital,  much  labor, 
and  of  almost  all  professional  activities,  and  of  all  or  nearly  all 
managerial  ability. 

It  is,  indeed,  fairly  clear  that  if  in  costs  we  abandon  the  point  of 
view  of  him  who  pays  the  costs,  and  go  over  to  the  question  of  cost 
from  the  point  of  view  of  the  recipient  of  the  remuneration,  the  income- 
collector,  and  attempt  to  distribute  these  incomes  into  cost  and  non- 
cost  categories,  we  shall  have,  for  competitive  purposes,  a  worthless 
computation   applied   to   the    solution   of  an   unsolvable   problem. 

But  in  point  of  fact,  the  distinction  between  value-determined  and 
value-determining  distributive  shares  is   as   worthless   as   it  is   unwork- 


402  VALUE  AND  DISTRIBUTION 

Marshall's  discussion  of  land  rent  as  income  requires 
no  very  protracted  consideration.  It  must,  however,  always 
be  a  source  of  error,  though  not  necessarily  of  very  serious 
error,  to  assume  as  basis  of  the  discussion  that  the  tenant 
farmer  is  a  man  of  normal — whatever  that  may  mean—: 
ability  and  enterprise  for  that  particular  class  of  tenancy; 
and  that  if  he  rises  above  that  standard,  he  will  himself 
reap  the  benefit;  "if  he  falls  below  it,  he  will  bear  the  loss." 
So  far  as  there  is  truth  in  this,  it  is  self-evident, — which  is 
no  objection  to  it;  but  surely  the  normal  man  has  no  signifi- 
cance in  this  connection,  since  normal  men  do  not  make 
the  price  offers  against  which  the  successful  tenant  has  to 
bid  in  his  competition  to  rent  the  productive  agent. 

Out  of  the  income  derived  from  the  land,  the  landlord, 
it  is  said,  obtains  a  share, 

governed,  for  all  periods  of  moderate  length,  mainly  by  the  market 
for  the  produce,  ....  and  it  is  therefore  of  the  nature  of  a  rent. 
And  that  part  which  the  tenant  retains,  is  to  be  regarded,  even  for 
short  periods,  as  profits  entering  directly  into  the  normal  price  of 

able.  In  the  broader  view,  all  agents  are  value-determined  in  their 
remunerations,  that  is,  the  value  of  each  is  the  result  of  the  total  situa- 
tion in  which  each  as  cause  has  exercised  only  an  infinitesimal,  or  at 
least  an  unimportant  part.  But  none  the  less  each  is  in  its  minor 
share  a  cause  ;  each  item  of  supply  or  of  demand,  precisely  because  it 
is  a  part  of  the  total  supply  or  of  the  total  demand,  has  its  effect  upon 
the  price  ;  no  marginal  item,  either  of  demand  or  of  supply,  has  more 
to  do  with  the  price  than  to  change  the  price,  to  the  extent  of  one  item 
of  result,  from  what  the  price  would  otherwise  have  been.  Is  it  true 
that  the  last  straw  breaks  the  camel's  back?  or,  if  with  nine  boys  upon 
a  raft  it  barely  floats,  is  there  profit  in  inquiring  whether,  when  a 
tenth  boy  jumps  on,  he  sinks  the  others  or  is  rather  sunk  by  them? 
or  whether  in  the  clash  of  contending  armies,  any  soldier  is  sweeping 
forward  or  is  being  swept  ?  or  in  attempting  to  decide  whether,  when 
the  scales  are  finally  tipped,  the  marginal  increment  of  goods  is  motion- 
determining  or  is  motion-determined?  True  it  is  that  the  rent  of 
land  or  the  wage  of  labor  is  a  derivative  from  the  value  situation, — is 
price-determined  in  this  sense  ;  but  equally  true  is  it  that  the  supplies 
are  larger  and  the  prices  lower  because  of  the  productiveness  of  this 
land,  or  of  the  effectiveness  of  this  labor  ;  and  in  no  other  sense  than 
this  is  any  agent  or  instrument  price-determining. 

There  is  nothing  for  the  case  but  to  keep  in  mind  that  all  these 
incomes  for  hired  agents  are,  from  the  hiring  point  of  view,  costs,  since 
they  express  the  market  price,  competitively  established,  of  the  efficiency 
service  in  value  creation.  All  remunerations  are  price-determined,  and 
all  agents  are  price-determining,  but  as  process,  all  this  is  worked  out 
through  entrepreneur  methods  and  adjustments.  There  is  ultimately 
no  marginality  anywhere  in  economic  affairs,   excepting  with  the  mar- 


ATTEMPT  AT  RECONCILIATION  403 

the  produce;  because  the  produce  would  not  be  raised  unless  it  were 
expected  to  yield  those  profits.^^ 

Stopping  merely  to  query  whether  the  share  retained 
by  the  tenant  can  accurately  be  spoken  of  as  a  part  of  the 
income  "derived  from  the  land,"  it  remains  to  object  that 
not  all  of  the  tenant's  profit  need  be  expected  in  order  to 
induce  the  production,  that  is,  not  all  the  profit  is  cost. 
Some  portion  of  this  profit  is  commonly  a  personal  differ- 
ential, partly  by  virtue  of  peculiar  adaptation  to  the  land — 
renter's  quasi-rent — partly  a  peculiar  adaptation  to  the  crop 
as  against  any  other  crop,  partly  a  peculiar  adaptation  to 
agriculture  as  against  any  other  line  of  occupation, — unless 
of  course,  the  talk  is  of  a  marginal  entrepreneur,  which 
case,  however,  cannot  be  in  Marshall's  thought,  since  mar- 
ginal production,  in  his  scheme  of  things,  takes  place  only 
on  marginal  land. 

In  summing  up,  it  is  to  be  said  that  Marshall's  analysis 
of  demand  and  of  marginal  utility  is  a  great  advance  over 

ginal  entrepreneur,  or  with  such  agents  as,  through  their  relation  to  the 
entrepreneur  and  to  his  plans  and  circumstances,  arrive  in  that  relation 
at  this  position  of  marginship.  And  to  conceive  of  agents  of  production 
in  their  relation  to  the  plans  and  circumstances  of  the  entrepreneur  is 
to  conceive  of  them  as  members  of  a  productive  group  or  complex,  and 
as  commanding  their  rent  or  their  value  by  virtue  of  their  importance 
as  marginal  items  in  making  up  this  group  complex. 

But  there  is  no  reason  to  suppose  that  all  agents  of  any  productive 
sort  may  not  command  a  quasi-rent  of  occupation  or  of  employment. 
When  an  agent  is  marginal,  it  is  so  merely  in  the  sense  that  its  relation 
to  the  entrepreneur  is  such  that  he  is  on  the  point,  if  the  price  falls, 
of  rearranging  his  production  group  and  of  dispensing  with  the  services 
of  this  agent  as  used;  but  it  does  not  follow,  and,  for  the  purposes  in 
hand  it  does  not  matter,  that  the  agent,  if  relinquished,  may,  under 
another  entrepreneur,  remain  in  the  same  line  of  activity,  or  may 
become  in  some  other  line  of  activity  a  producing  agent,  or  may  go  out 
of  use  entirely.  In  any  case  some  or  all  of  the  powers  of  the  agent 
will  cease  to  be  utilized  if  price  falls  ;  it  is  sufficient  that  through  it 
some  elasticity  of  supply  obtains. 

And  just  at  this  point  it  is  worth  while  to  repeat  that  the  value 
margin  of  rentlessness  and  the  margin  of  utilization  do  not  of  necessity, 
or  even  commonly,  coincide.  That  an  item  of  land  or  of  machinery  is 
rentless  and  valueless  in  the  market  does  not  imply  that  in  the  hands  of 
its  particular  employing  entrepreneur  it  is  on  the  point  of  abandon- 
ment ;  there  are  possible  quasi-rents  of  adaptation   here. 

And  it  may  be  remarked  that  for  purposes  of  tax  theory,  and 
especially  in  the  field  of  shifting  and  incidence,  these  quasi-rent  quanti- 
ties are   of  very  great   significance. 

^'Marshall,  op.  cit.,  p.  716  (5th  ed.,  p.  636). 


404  VALUE  AND  DISTRIBUTION 

,  that  of  the  Austrians,  and  leaves  little  or  nothing  to  be 
P  desired;  but  that  his  account  of  cost  of  production  fails 
I  precisely  because  he  does  not  apply  here  a  parallel  analysis 
I  of  margins,  that  is,  does  not  conceive  of  marginal  cost  as  a 
[  ratio-relation  in  which  secondary  and  competing  demands 
I  are  now  of  paramount  and  now  of  exclusive  importance. 
I  That  his  emphasis  is  upon  cost  rather  than  upon  utility  is 
)  due  to  the  fact  that  he  has  failed,  as  have  the  Austrians, 
i  to  perceive  that  of  utility  and  sacrifice,  demand  and  cost, 
each  is  as  truly  as  the  other  mainly  an  expression  of  ratios 
of  marginal  utility  based  upon  opposing  demands. 

That  Marshall's  analysis  of  the  relations  between  rent 
and  cost  is  so  unsatisfactory  is  due  to  the  fact  that  he  has 
not  appreciated  that  cost  as  bearing  upon  supply  is  not  a 
collectivist  phenomenon,  but  is  strictly  an  entrepreneur 
computation,  and  as  such  is  exclusively  within  the  sphere  of 
the  individual  psychology,  and  that  what,  from  one  point 
of  view,  is  not  cost  but  income,  a  value-determined  share, 
;  cannot  be  carried  over  to  the  other  point  of  view  without 
changing  its  significance  and  appearing  as  cost ;  and  finally 
that  with  cost,  as  an  individual  reckoning,  a  producer  may 
as  readily  be  marginal  upon  non-marginal  land  as  upon 
marginal  land,  or  may  as  readily  be  non-marginal  with 
marginal  agents  as  with  non-marginal. 


CHAPTER  XXI 

THE   ATTEMPT    AT    RECOXSTRUCTIOX :      HOBSON 

In  the  main,  Boehm-Bawerk's  scheme  of  market  analy- 
sis is  followed  by  Hobson,  to  the  extent  of  showing  that 
rigid  outside  limits  are  fixed  for  prices :  "But  to  fix  limits 
for  a  price  is  not  to  fix  a  price  and  curiously  enough 
Boehm-Bawerk  leaves  his  analysis  at  this  interesting  point." 
Competition  does  not  settle  it;  it  is  left  to  bargaining,  and 
Heaven  knows  how  it  would  settle  if  each  bargainer  knew 
his  opponent's  subjective  valuations:  "Why  should  either 
party  give  way?  There  is  no  economic  method  of  reach- 
ing a  price  point  here,"  though  there  might  be  a  toss-up  or 
a  splitting  of  the  difference.  "Competition  stakes  out  a 
ring  v.'ithin  which  bargainers  fight  it  out  by  force  and 
craft."  ^ 

On  page  ly  Hobson  gives  the  first  intimation  of  a  view 
later  prolific  of  much  bad  reasoning,  namely,  that  "the 
effectual  buyers  and  sellers  whose  subjective  price  limits  lie 
above  and  below  the  limits  within  which  a  price  point  is 
fixed,  and  who,  therefore,  take  part  in  the  bidding  of  the 
market,  have  no  direct  influence  upon  the  price."  But  the 
marginal  pair — not  pairs,  Hobson  rightly  insists — are  "those 
members  of  the  market  whose  subjective  valuation  fixes  the 
possible  limits,  etc." 

The  difficulty  is,  of  course,  with  the  word  "fixes,"  and 
with  the  implication  that  the  non-marginal  traders  have 
little  or  nothing  to  do  with  the  case,  which  implication 
later  appears  to  be  Hobson's  real  position.' 

^  John  A.  Hobson,  The  Economics  of  Distribution,  Macmillan,  1900, 
p.   16. 

'  This  doctrine  that  there  is  an  inter-marginal  area  of  "forced 
gains,"  where  competition  does  not  rule,  is  also  emphasized  by  Mac- 
farlane  {Value  and  Distribution,  chap,  v),  and  is  correct  for  whatever  it 
is  worth  ;  no  Austrian  would  question  farther  than  upon  this  issue  of 
worth.     It  is  true  that  the  Austrian  discussion  of  value,  as  an  account 

405 


4o6  VALUE  AND  DISTRIBUTION 

The  long-time  or  normal  price,  as  Hobson  rightly  urges, 
can  give  no  assurance  that  the  total  gains  of  trade  will 
divide  equally  between  buyers  and  sellers.  If  the  thing 
went  by  chance,  it  might  be  otherwise,  but  not  so  if  the 
superiority  in  bargaining  belongs  permanently  to  one  side. 
There  is  no  reason  for  thinking  that  the  long-time  price 

of  the  logic  implicit  in  the  market  process  rather. than  as  an  accurate 
description  of  the  objective  fact,  assumes  that,  as  the  items  of  offer 
and  demand  become  more  numerous,  this  margin  interval  of  higgling  is 
constantly  narrowed.  A  sufficiently  minute  gradation  of  both  offer  and 
demand  is  taken  for  granted — so  near  an  approach  to  infinitesimals — as 
to  justify  the  treatment  of  the  selling-price  as  accurately  a  marginal 
price  for  both  demand  and  supply.  Admitting  all  the  necessarily 
assumed  conditions  to  be  actual,  viz.,  that  all  the  commodities  are  of 
equal  desirability,  all  the  competitors  in  the  market  simultaneously, 
and  "that  the  buyers  and  sellers  make  no  mistakes  about  the  actual 
state  of  the  market  such  as  would  prevent  them  from  really  pressing 
their  egoistic  interests"  (Positive  Theory,  p.  204)  ;  assuming,  in  short, 
a  perfectly  frictionless  market,  all  this  may  be  accepted,  as  a  purely 
theoretical  and  logical  account  of  the  case  ;  but  it  is,  of  course,  quite 
another  and  a  quite  more  dubious  matter  to  assert  that  the  point  of 
adjustment  expresses  marginal  utilities,  or  measures  them,  or  is 
measured  by   them,   and   especially   that  it   is   fixed   by   them. 

Hobson  and  Macfarlane  place  especial  emphasis  upon  this  inter- 
marginal  area  as  a  matter  of  very  considerable  practical  as  well  as 
theoretical  importance.  And  it  is  true  that  in  many  cases  there  is 
appreciable  room  for  sheer  bargaining  skill  and  bargaining  guile,  and 
for  oppressive  use  of  this  advantage ;  for  really,  no  two  horses  are 
precisely  alike,  and  "an  actual  horse  market  ....  would  not  in  fact 
result  in  the  attainment  of  an  exact  market  price  for  a  giv^en  quality  of 
horse."  Nor  is  the  gain  of  the  purchaser  dependent  solely  upon  the 
discrepancy  between  his  direct  subjective  valuation  and  that  of  the 
market — upon  his  mere  consumer's  rent.  He  is  buying  to  sell  again, 
and  "A  can  only  value  the  same  goods  at  20  per  cent,  more  than  B 
because  he  enjoys  some  trading  or  manufacturing  advantage  (objective) 
which  enables  him  to  put  what  he  has  bought  to  a  larger  productive 
use"  (Hobson,  op.  cit.,  p,  24).  Again,  as  to  the  seller  of  horses,  the 
supply  is  not  infinitely  divisible  ;  "there  are  distinct  and  fairly  wide  inter- 
vals of  valuation  between  the  several  units" :  but  the  purchasing 
medium  is  indefinitely  divisible,  which  facts  impair  "the  practical 
service  of  the  whole  mathematical  treatment,"  unless  with  goods  like 
corn  or  cotton.  With  these  last,  there  is  "a  far  closer  and  more  effect- 
ive competition  between  buyers  on  the  one  hand  and  sellers  on  the 
other,  the  result  being  that  the  limits  between  which  ordinary  competi- 
tion breaks  down  are  much  narrower"  (p.  ,37).  And,  more  important 
yet,  many  markets  are  local  or  partly  isolated  in  character,  rather  than 
in  close  touch  with  the  world-market,  as,  for  example,  with  highly 
perishable  and  with  cheap  and  bulky  articles ;  in  such  cases  competition 
breaks    down    early.      And    there    are    rings    and    speculators ;    farmers, 


ATTEMPT  AT  RECONSTRUCTION  407 

will  be  a  fair  competitive  price  in  the  sense  of  excluding 
bargaining  for  gain :  "Average  the  dealings  of  small 
money-lenders  with  their  clients  over  a  term  of  years ;  you 
obtain  a  normal  price  of  such  loans,  but  that  price  reflects 
a  normal  advantage  possessed  by  such  money-lenders."  ^ 

For  problems  of  price  change,  Hobson's  way  of  con- 
ceiving demand  and  supply  is  helpful, — supply,  the  rate  of 
increase  of  stock, — demand,  the  rate  of  withdrawal,  both 
flows  rather  than  funds,  with  prices  rising  or  falling  as  one 
flow  exceeds  the  other.  For  any  particular  commodity  the 
demand  flow  is  best  expressed  as  money.  Value  is  thus  no 
inherent  quality,  whether  as  regarded  by  one  school  as 
expressive  of  cost  or  by  the  other  school  as  expressive  of 

miners,  and  fishermen  sell  to  middlemen  under  conditions  of  feeble  or 
non-existent  competition,  and  are  more  or  less  at  the  mercy  of  shippers, 
importers,  and  wholesalers,  or  of  patents,  secret  processes,  and  combina- 
tions :  "These  and  similar  causes  render  the  conditions  of  free  and 
fluid  competition  inoperative  over  a  vast  majority  of  the  processes  in 
the  sale  of  goods"  (p.  32).  So  with  the  renting  of  land  or  the  borrow- 
ing of  capital,  with  the  wage  contract,  the  contracts  of  author  with 
publisher,  of  mistress  with  servant,   of  hotel-keeper  with  guest. 

Again,  the  buyer  is  the  holder  of  money  as  against  the  seller  of  a 
specialized  commodity :  "the  urgency  of  a  trade  use  is  less  than  the 
urgency  of  a  personal  need."  True,  the  buyer  for  personal  consumption 
is  often  in  the  reverse  case,  having  to  buy  now  from  someone  who  is 
not  obliged  to  sell  now :  "so  ....  venders  of  refreshments  or  books 
in  a  railway  station  enjoy  a  distinct  advantage  in  bargaining."  But 
ordinarily  "the  uncertainty  of  finding  a  purchaser  at  a  calculable 
price  ....  must  be  accounted  the  weakness  of  the  seller  as  com- 
pared with  the  buyer"  (p.  37).  And  "the  scale  upon  which  the  large 
business  is  conducted  enables  it  to  employ  skilled  specialists  in  buying 
and  in  selling"  (p.  39). 

It  is  worthy  of  note  that  Hobson  carries  his  idea  much  farther  than 
Macfarlane  in  pointing  out  that  the  volume  of  commodities  not  suscep- 
tible of  marginal  valuation  by  stocks  is  not  a  minor  quantity  in  actual 
business  but  is  possibly  even  much  the  more  important  quantity.  And 
it  is  doubtless  important,  not  merely  from  a  practical  but  from  a 
theoretical  point  of  view,  that  all  this  be  recognized.  But  the  failure 
of  competition  in  the  fixation  of  prices,  while  of  vast  importance  prac- 
tically and  greatly  in  danger  of  overlooking,  does  not  appear  to  have 
large  theoretical  significance  ;  Hobson's  criticism  points  to  the  necessary 
allowances  to  be  made,  for  practical  purposes,  where,  as  is  the  usual 
case,  actual  market  conditions,  instead  of  being  fully  competitive,  are 
complicated  in  some  measure  by  monopoly  influences. 

^  Ibid.,  p.  57. 


4o8  VALUE  AND  DISTRIBUTION 

utility ;  the  one  theory,  as  Hobson  interprets  it,  denies  the 
bearing  of  all  influences  not  acting  through  cost  of  produc- 
tion ;  the  second  theory  admits  influences  from  the  cost  side 
only  so  far  as  they  serve  to  operate  upon  utility.  One 
theory  looks  at  costs  as  giving  value ;  the  other,  regarding 
the  problem  from  the  standpoint  of  consumption,  takes 

the  consumer's  test  of  the  valuable — utility — to  refer  it  back  as  a 
property  potentially  existing  in  different  classes  of  goods  which  are 
on  their  way  to  blossom  into  really  useful  goods  when  they  reach 

the  consumer Stand  at  one  end  of  the   stream  of  industry, 

you  see  goods  gathering  cost  as  they  pass  from  process  to  process 
in  production,  and  then  cost  appears  to  be  the  value  which  is  grow- 
ing; stand  at  the  other  end,  value  seems  only  to  emerge  from  the 
contributions  which  productive  processes  make  toward  the  supply  of 
consumables All  holders  of  a  "cost"  theory  admit  that  valu- 
able things  must  be  useful,  but  this  utility  is  only  a  condition ; 
"utility"  men  allow  that  cost  affects  the  value  of  all  freely  produced 
goods,  but  they  maintain  cost  is  the  condition,  utility  is  the  efficient 

cause It    is    difficult    to    comprehend    why    a    change    in    the 

value  of  a  stock  of  wheat,  due  to  a  favorable  season  or  a  new 
railway,  should  be  attributed  to  demand,  which  has  either  not 
changed,  or  the  change  of  which  has  been  clearly  consequent  upon 
an  enlargement  of  supply.  If  scarcity  changes  value  by  changing  the 
marginal  utility,  why  is  not  the  cost  factor  a  determinant  of  utility? 
In  fact,  value  is  affected  "by  changes  proceeding  from  either  side, 
and  this  distinction  between  causes  and  conditions  of  value  has  no 
ultimate  validity."  It  will  not  do  for  the  manufacturer  to  assume 
that  goods  will  sell  high  solely  because  they  are  costly  to  make;  and 
when  "Mr.  Beecham  sells  us  pills  which  he  perhaps  correctly  observes 
are  'worth  a  guinea  a  box'  to  us  and  yet,  with  a  rare  spirit  of  self- 
denial,  consents  to  take  i  s.  lo  d.  he  is  regulating  the  price  rather  by 
the  consideration  of  the  cost  to  him  than  the  utility  conferred 
upon  us."* 

It  is  doubtless  true  that 

from  utility  through  demand  proceed  the  very  forces  that  direct  and 

evoke  costs But  though  utility  thus  figures  as  the  final  cause 

of  value,  it  is  not  rightly  taken  as  the  sole  efficient  cause  or  as  the 
sole  determinant  of  quantity  of  value  attaching  to  a  stock  of 
goods," 

*  Hobson,  op.  cit.,  pp.  66-71. 
"  Ibid.,  p.  75. 


ATTEMPT  AT  RECONSTRUCTION  409 

for  the  problem  of  the  volume  of  the  supply  is  still  there. 
And  cost  is  perhaps  the  more  convenient  business  way  of 
arriving-  at  values,  since  every  change  in  demand  forces 
will  express  itself  as  a  change  in  the  costs  against  which 
the  demand  is  equated,  just  as  changes  in  cost  will  express 
themselves  in  utility.  And  Hobson  insists  that  Dietzel,  in 
his  controversy  with  Boehm-Bawerk,  was  wrong  in  admit- 
ting that  goods  limited  in  supply  get  their  value  from  their 
utility.  Dietzel  should  have  stood  for  scarcity  also,  it 
being  true  that  only  as  explanation  for  scarcity  has  cost 
any  significance.  And  so  Marshall,  in  suggesting  that,  for 
short  periods,  our  attention  is  best  fixed  upon  demand,  and 
for  long  periods  upon  supply,  would  be  wrong  if  he  had 
intended  to  imply  that  cost  is  in  ultimate  analysis  more 
important  than  utility  as  a  regulator  of  value;  and  in  fact 
it  is  not  clear  that  more  or  more  enduring  forces  affect 
value  from  the  production  side  than  from  the  consumption 
side. 

Thus  far  in  all  of  this  there  is  remarkably  little  that  is 
not  admirable,  with  the  exception  of  the  "fixation  by  mar- 
gins;" but  in  the  latter  portion  of  it,  there  is  too  little  or  no 
recognition  that  changes  in  the  demand  for  other  lines  of 
goods,  say  an  increased  demand,  must  have  the  effect  to 
decrease  the  supply  of  the  particular  line  of  goods  under 
consideration.  It  is  in  fact  by  the  demand  for  other  goods, 
— through  the  resistance  of  other  industries, — that  limita- 
tion is  worked  upon  the  supply  of  productive  goods  and 
agents  in  any  given  industry. 

That  Hobson  does  not  here  appreciate  in  its  essentials 
this  displacement  or  opportunity  aspect  of  cost, — this  resist- 
ing-demand  aspect,  is  evident  from  his  assertion  that  value 
in  the  individual  economy  may  be  treated  as  a  case  "of 
exchange  worked  out  between  the  two  sides  of  ourselves, 
the  idle  self,  which  shirks  effort,  the  greedy  self,  which 
seeks  satisfaction." "  This  formulation  would  be  inade- 
quate for  any  non-producing  individual  economy,  say,  the 
ordinar}'  child  or  woman,  or  for  him  who  finds  pleasure  in 
work  and  yet  recurrently  quits  work  because  of  the  greater 
attractiveness  of  recreation.     This  last  is  truly  a  case  of 

'Hobson,  op.  cit.,  p.  gi. 


4IO  VALUE  AND  DISTRIBUTION 

cost  in  the  sense  of  a  supply-limiting  influence,  but  in  this 
sense  only.  The  reservation  Indians,  after  the  govern- 
ment distribution  of  supplies,  get  at  a  system  of  valuation, 
each  for  himself,  and  a  derivative  system  of  exchange 
relations  for  the  group  as  a  whole. 

Subjective  cost  and  subjective  utility  are  by  Hobson  dis- 
tinguished from  objective  cost  and  objective  utility. 

Subjective  cost  must  be  taken  to  consist  of  the  actual  effort 
of  workers  measured  in  terms  of  disagreeable  feeling  and  regarded 
as  a  quantity,  i.  e.,  disutility  in  work,  as  estimated  by  the  individual 
consciousness  of  the  worker.  Objective  cost  must  be  taken  to  mean 
the  productive  energy  which  attaches  to  this  effort,  referred  for 
measurement  to  some  objective  standard,  i.e.,  hours,  foot-tons,  etc' 

Apparently,  then,  no  two  things  could  be  farther  apart 
than  subjective  and  objective  cost;  the  case  is,  indeed,  not 
one  of  contrast  or  of  opposition,  positive  and  negative,  but 
rather  of  entire  incommensurability,  incomparability,  and 
irrelevancy.  Note  also  the  use  of  the  plural,  "the  actual 
effort  of  workers,  etc and  regarded  as  a  quan- 
tity," Is  this  a  group  notion  of  an  absolute  feeling  magni- 
tude? 

Subjective  cost  appears  to  be  the  opposite  of  subjective 
utility,  "the  pleasurable  feeling  got  out  of  consumption  by 
the  consumer,"  assuming,  as  perhaps  we  may — or  may  not 
— that  the  consumer  and  the  producer  are  the  same  person. 
Objective  utility,  however,  is  not  precisely  the  opposite  of 
objective  cost,  the  foot-tons  of  energy  attaching  to  the 
effort  of  production ;  objective  utility  measures  "the  services 
of  consumable  goods  by  some  objective  standard,  i.  e.,  the 
power  of  sustaining  life,  or  ...  .  the  actual  heating- 
power  in  a  hundredweight  of  coal."  * 

[Now]  while  the  subjective  cost  and  utility  which  attach  to  the 
production  and  consumption  of  wealth  are  evidently  the  true  meas- 
ure of  economic  prosperity  ....  the  operations  of  the  actual  busi- 
ness world,  as  expressed  by  money  valuations,  have  direct  reference 
only  to  objective  cost  [foot-tons,  etc.]  and  to  objective  utility 
[life-sustaining  or  body-heating  power  and  the  like]. 

'  Hobson,  op.  cit.,  p.  99. 
» Ibid. 


ATTEMPT  AT  RECONSTRUCTION  4" 

But  whatever  this  means,  and  whether  or  not  it  is  true, 
no  attempt  is  made  to  equate  or  to  relate  objective  cost  to 
subjective  cost,  to  equate,  that  is  to  say,  the  expenditure  of 
units  of  energy  with  the  pain  burden  of  this  expenditure : 
"A  given  quantity  of  objective  cost  may  be  related  to 
indefinitely  divergent  quantities  of  subjective  cost;"  workers 
are  of  all  grades  of  strength  and  endurance. 

So  also  there  is  little  or  no  correspondence  between 
subjective  utility  and  objective  utility;  consumers  vary 
widely  in  capacity  for  enjoyment  and  in  methods  of  enjoy- 
ment, and  with  changes  in  age,  financial  well-being,  and 
health,  each  man  is  for  the  purpose  a  dififerent  man;  "food 
will  vary  in  subjective  utility  from  infinity  to  zero,  accord- 
ing as  it  passes  into  the  possession  of  a  starving  person  or 
a  fully  fed  one." " 

Whether  as  criticism  or  as  interpretation,  it  is  at  all 
events  to  be  inferred  from  all  this  (i)  that  there  is  no 
market  method  of  comparing,  for  market  purposes,  sub- 
jective costs  with  subjective  utilities;  (2)  periods  of  time 
cannot,  for  market  purposes,  serve  as  measure  of  any  sort 
of  cost;  (3)  nor  is  there  any  machinery  in  the  market  for 
comparing  goods  according  to  life-sustaining  power  or 
pleasure-giving  service,  nor  any  machinery  for  comparing 
foot-tons  of  energy  excepting  in  terms  of  price. 

And  so,  objective  costs  not  being  comparable  as  outlay 
so  as  to  serve  as  explanation  of  value  or  of  price,  and  being 
comparable  by  the  entrepreneur  only  in  terms  of  price ;  and 
subjective  costs  not  being  comparable  at  all,  since  they 
are  feelings  of  dififerent  persons;  and  objective  costs 
not  being  reducible  to  subjective  costs,  or  comparable 
with  them,  it  only  needs  the  following  added :  "A 
given  quantity  of  objective  utility  will  vary  indefinitely 
when  reduced  to  terms  of  subject  utility."  And  yet 
somehow  out  of  this,  Hobson  arrives  at  the  notion 
that, 

'Hobson,  op.  cit.,  p.  loi. 


412 


VALUE  AND  DISTRIBUTION 


Subjeclive 
Cost 

Objective 
Cost 

Measured  in 
units  of  un- 
desirability 
of  effort 

Measured  in\ 
hours,  foot-   1 
tons,  or         ( 
other  meas-  / 
ures  of  out-  \ 
put                 / 

Importance 
or  Value 

referring  to  our  theory  of  Value  or  Importance,  the  terms  will  take 

the  following  setting : 

Objective  Subjective 

Utility  Utility 

Measured  in 
power  of  sus- 
taining vital 

energy,  or       Measured  in 
furnishing       units  of  de- 
mechanical      sirability  by 
force,  i.e.,       consumers 
nitrogenous 
units,  or  de- 
grees of  tem- 
perature 

It  may  well  be  that  this  exposition  falls  far  short  of 
doing  justice  to  the  actual  meaning  and  doctrine  pre- 
sented by  Hobson ;  for  the  present  writer  confesses  him- 
self to  have  not  the  slightest  idea  of  what  it  all  means.  In 
the  first  place,  it  is  not  clear  whether  the  discussion  is 
intended  to  restrict  itself  to  the  field  of  subjective  value. 
The  chapter  is  entitled  "The  Subjective  Basis  of  Value,"  and 
opens  with  the  following  words :  "In  order  to  mark  the 
essentially  subjective  nature  of  the  theory  of  value,  it  is, 
etc."  And  it  is  to  be  noticed  that,  despite  the  fact  that 
subjective  value,  in  the  established  sense,  or  in  any  intelli- 
gible sense,  is  purely  an  individual  category,  this  "setting" 
given  to  the  "value  and  importance"  problem  presents  the 
case  as  in  part  a  matter  of  "units  of  desirability  by  con- 
sumers." And  directly  following  upon  this  "setting"  or 
formulation,  the  disctission  runs  fully  in  terms  of  market 
forces  and  adjustments:  "The  first  portion  that  is  sold 
goes    to    satisfy    the    strongest    desires    of    consumers,    the 

next  portion  a  somewhat  weaker  desire,  and  so  on 

Yet  all  portions  have  the  same  price  and  the  same  value."  ^'^ 

It  is  at  any  rate  clear  that  this  manner  of  analysis  is 
intended  and  believed  by  Hobson  to  avoid  somehow  the 
difficulty  facing  the  utility  school,  "to  explain  how,  with  a 
diminishing  utility  attached  to  the  successive  portions  sold, 
the  value  and  price  of  the  part  which  serves  the  fullest  use 
are  as  great  as  that  which  supplies  a  necessary  of  life."  " 

^"Hobson,  op.  cit,,  p.   102. 
"  Ibid. 


ATTEMPT  AT  RECONSTRUCTION  413 

The  idea  seems  to  be  that  value  is  a  compound  of 
diminishing  utility  and  increasing  cost,  the  two  being  held 
at  equilibrium  and  equality  by  the  fact  that  as  the  one 
increases  the  other  diminishes,  and  vice  versa : 

The  first  portion  that  is  sold  goes  to  satisfy  the  strongest  desires 
of  consumers,  the  next  portion  a  somewhat  weaker  desire,  and  so  on 
until  the  last  portion  that  is  sold  satisfies  the  weakest  desire,  or, 
using  the  ordinary  language,  has  the  smallest  utility  attached  to  it. 

Yet  all  portions  have  the  same  price  and  the  same  value Our 

tabulation  which  makes  value=importance,  shows  that  the  importance 
attaching  to  all  portions  of  the  supply  that  are  sold  is  equal.  For 
as  the  subjective  utility  furnished  by  consumption  of  the  later 
units  of  supply  diminishes,  the  subjective  cost  of  producing  these 
has  increased.  The  first  unit  of  consumption  which  satisfies  the 
strongest-felt  need  is  rightly  considered  as  taking  off  that  portion 
of  supply  which  would  be  produced  if  no  other  were  produced,  be- 
cause it  can  be  produced  most  easily.  Each  later  portion  .... 
satisfies  a  weaker  need,  but  is  produced  at  greater  cost,  and  since 
cost  plays  the  same  direct  part  in  assigning  importance  or  value  to 
an  article  as  does  utility,  there  is  no  diminution  of  value  by  a  reduc- 
tion of  utility  accompanied  by  a  corresponding  rise  of  cost.  The 
last  portion  of  supply  with  the  least  subjective  utility  has  the 
highest  subjective  cost.^^ 

This  seems  to  mean  that  by  as  much  as  you  enjoy  a 
thing  more  yoti  may  be  sure  that  its  producer  was  less 
grievously  burdened  to  produce  it;  and  thereby  it  appears 
that  your  valuation  needs  be  low :  And  with  the  later  por- 
tions of  the  supply,  one's  wearied  marginal  appetite  is 
saved  from  positive  aversion  only  by  the  knowledge  that 
the  laxly  regarded  item  was  produced  at  the  maximum  of 
pain  to  its  producer.  And  so  the  drunkard  at  feast  could 
derive  not  even  a  minor  enjoyment  from  his  latest  cups 
were  he  so  fuddled  as  to  forget  that  "the  last  bottle  .... 
which  furnishes  the  smallest  satisfaction  to  the  drinker,  is 
the  bottle  the  production  of  which  represents  the  last 
hour's  labor  of  the  hardest-worked  producer,  i.  e.,  has  the 
highest  subjective  cost  attached  to  it."  ^^ 

But  if,  in  our  bewilderment  as  to  what  this  may  possi- 
bly mean,  we  incline  to  query  whether,  after  all,  the  talk 
may  not  be  purely  in  the  field  of  individual  production  for 

"  Hobson,  op.  cit.,  p.   102. 
^^  Ibid.,  p.  103. 


414  VALUE  AND  DISTRIBUTION 

personal  consumption,  an  analysis  of  strictly  subjective 
phenomena,  the  context  will  serve  to  negative  the  possi- 
bility. And  even  were  it  so,  it  would  be  hard  to  believe 
that  the  isolated  producer  attributes  any  satisfaction  in  a 
series  to  any  particular  item  of  procluctive  effort,  and 
esteems  all  items  in  the  pleasure  series  equally,  under  the 
computation  that  as  much  as  the  pleasure  of  consumption 
is  more  by  so  much  the  pain  of  production  was  less. 

LAND  RENT  AND  RENT  COST  ^* 

As  will  later  more  fully  appear,  Hobson  stands,  with 
reference  to  the  land-rent  and  the  rent-cost  problems,  for 
the  following  five  propositions  : 

1.  That  there  are  land  hires  that  do  not  enter  into  cost, 
and  other  land  hires  that  do  enter,  that  is,  that  there  are 
price-determining  and  price-determined  rents. 

2.  That  both  land  hires  and  product  prices  are  deter- 
mined by  a  process  of  margin  fixation. 

3.  That  the  determinant  margin  is  an  instrument  mar- 
gin rather  than  a  personal  margin ;  this,  however,  not  quite 
consistently. 

4.  That  the  services  of  land,  labor  [and  capital  goods?] 
are  reduced  to  a  common  denominator,  that  is,  are  funded 
in  terms  of  productivity  units. 

5.  That  the  fundamental  principle  in  the  analysis,  the 
guide-thread  for  the  labyrinth,  the  key  doctrine  in  the  prob- 
lem, is  the  law  of  displacement  cost,  the  alternative  use  of 
the  productive  agent,  that  which  we  have  already  analyzed 
as  the  opportunity-cost  principle,  applied,  however,  by 
Hobson,  not  in  the  competitive  sense,  but  from  the  col- 
lectivist  point  of  view  and  in  the  collectivist  tenor. 

Ricardo's  method  of  finding  price-determining  cost  at 
the  no-rent  extensive  margin  of  land,  whereby  all  rent 
could  be  regarded  as  the  result  rather  than  the  cause  of 
price,  Hobson  declares  to  be  erroneous  as  based  upon  "a 

"  Hobson,  Th^  Laiv  of  Rent  as  the  Basis  of  Co-ordination  of  the 
Factors  of  Production,  Part  ]. 


ATTEMPT  AT  RECONSTRUCTION  415 

fallacious  simplicity  in  the  abstract  setting  given  by  Ricardo 
to  his  problem"  (p.  119).  Of  the  Ricardian  assumptions, 
(i)  that  wheat  is  the  only  agricultural  product,  and  (2) 
that  this  product  is  raised  upon  extensive-marginal  land, 
neither  is  correct.  But,  as  Hobson  declares,  were  the 
assumptions  correct,  the  conclusions  deduced  by  Ricardo 
would  be  irrefutable. 

"Neither  of  these  assumptions  is  absolutely  warrant- 
able ;"  even  were  there  no  grazing  use  to  absorb,  as  against 
wheat,  the  poorest  grade  of  land,  conditions  might  exist 
such  that  if  "an  increase  in  the  population  and  the  demand 
for  wheat  brings  into  cultivation  all  the  land  available,  the 
worst  land  in  use  may  or  must  bear  an  actual  rent."  This 
land  rent,  it  is  said,  "will  not  be  a  differential  rent,  but  a 

forced  or  scarcity  rent Such  forced  rent  would 

evidently  be  reckoned  as  an  expense  incidental  to  all  por- 
tions of  the  wheat  supply,  and  would  enter  into  the  prices" 
(p.  120). 

But  the  grazing  use  and  countless  other  uses  are  really 
to  be  taken  into  account:  "What  really  invalidates  the 
Ricardian  treatment  is  the  fact  that  most  land  in  use  has 
several  alternative  uses  or  can  contribute  toward  several 
different  supplies"  (p.  120). 

That  the  Ricardian  argument  could  in  principle  be  as 
satisfactorily  worked  out  at  the  intensive  as  at  the  exten- 
sive margin,  we  have  already  seen;  and  Hobson  later 
turns  his  attention  to  this  aspect  of  the  case,  and  points  out, 
among  other  objections,  that  a  parallel  line  of  reasoning 
could  be  equally  well  invoked  to  exclude  wages  and  interest 
from  cost.  And  surely  the  argument  from  the  extensive 
margin  is  open  to  the  objections  raised  by  Hobson,  as  well 
as  to  others  still  more  serious ;  the  poorest  of  wheat  land 
does  actually  pay  an  appreciable  rent,  and  even  were  there 
any  entrepreneur  outlays  justifiably  to  be  excluded  from 
the  entrepreneur-cost  computation,  there  is  no  very  evident 
reason  why,  as  an  cxtcnsivc-margin  argument,  this  poorest- 
land  rent  should  not  be  included. 

But,  as  we  have  seen,  Hobson  does  not  greatly  rely  upon 
this  objection;  he  is,  indeed,  clear  enough  that  such  condi- 


41 6  VALUE  AND  DISTRIBUTION 

tions  might  exist  as  to  invalidate  in  this  aspect  the  theoreti- 
cal tenability  of  the  Ricardian  position,  but  he  is  not  clear 
that  such  conditions  are  actually  existent.  Not  all  land 
anywhere  available  is  yet  in  actual  cultivation ;  the  "sup- 
ply contains  more  land  than  is  required,  some  of  which 
is  slightly  inferior  to  the  worst  land  in  use,"  so  that  under 
present  conditions  this  objection  "may  be  held  to  lie  outside 
of  practical  economics  for  a  country  in  open  commercial 
relations  with  the  world  supply  of  land"  ^* — which  is  cer- 
tainly generous  enough  in  concession — and  to  spare. 

The  serious  difficulty,  however,  as  Hobson  sees  it,  lies  in 
the  second  of  Ricardo's  assumptions,  that  of  the  wheat 
use  as  the  only  use  necessarily  to  be  considered  in  the  analy- 
sis. Thus  the  issue  is  shifted  to  the  significance  of  the 
alternative  use. 

The  conditions,  rightly  insisted  upon  by  Hobson  as 
actual,  may  be  illustratively  presented  as  follows :  Let  the 
poorest  wheat  land  in  use  command  a  20-per-acre  rent,  with 
the  better  lands  ranging  at  per-acre  rents  of  21,  22,  23,  24, 
25,  etc.,  up  to  30 ;  at  the  same  time  assume  that  fruit,  gar- 
dening, and  tobacco-culture  and  the  building  demand  bear 
with  such  relative  intensity  upon  the  better  lands  that  these,  as 
they  are  better  and  better,  have  smaller  and  smaller  differen- 
tials above  the  alternative  use,  that  is,  that  the  alternative  dif- 
ferentials upon  the  30,  29,  28,  27,  26,  25,  24,  23,  22,  21,  and 
20-hire  lands  are  respectively  j\,  j\,  ,%  ^%,  ^5^,  ^^^,  y,,  -/„, 
^,  -j-g.  Hobson  insists,  then,  that  it  is  the  30-hire  land  that 
is  marginal,  that  all  of  its  rent  is  cost  rent,  is  price-deter- 
mining rent,  and  that  with  the  other  lands,  ranging  down  to 
the  20-hire  land,  the  cost  rents  are, — 

On  the  29  hire  land 28-A 

"     "    28     "      "     27A 

"     "     27    "      "     26fo- 

"    "    26    "     "    25 A 

"  "  25  "   "  24A 

24  23-iv 

'*  Ibid.,  p.  1 20. 


ATTEMPT  AT  RECONSTRUCTION  41? 

On  the  23  hire  land 22 A 

22  2Ito 

21  20 1  (J- 

20  19 

and  that  the  price-determined  differentials  are  30—30=0; 
29  — 28Y^j  =  y\y;  28— 27i\=i2^^  etc.,  increasing  to  a  unit  of  price- 
determined  differential  for  the  20-hire  land/ 5 

^'^  It  must  in  fairness  be  said  that  Hobson  does  not  himself  put  his 
case  in  the  precise  terms  of  the  illustration  offered  ;  the  details  of  the 
scheme  of  statement  are  not  his,  but  those  of  the  present  writer  ;  but  the 
argument  seems  to  imply  them,  and  it  is  primarily  and  chiefly  to  the 
end  of  assigning  to  the  argument  its  clearest,  shortest,  and  most 
effective  statement  that  this  particular  device  of  presentation  is  adopted. 
It  must,  however,  be  at  the  same  time  admitted  that  this  manner  of 
exposition  is  chosen  in  some  measure  with  a  view  to  bringing  the  issues 
of  criticism  into  clearer  and  more  telling  definitioru  If  any  injustice  is 
done,  it  may  be  pleaded  that  it  is  not  intentional ;  but  there  is  perhaps 
the  more  urgent  call  that  whatever  justification  the  facts  afford  be 
promptly    submitted  : 

"Though  the  worst  grazing  land  may  pay  no  rent,  the  worst  wheat 
land  might  be  better  for  grazing  than  the  worst  grazing  land,  in  which 
case  it  can  only  be  obtained  for  growing  wheat  by  paying  a  little  more 
than  its  differential  rent  for  grazing  purposes  ;  this  rent  for  the  worst 
wheat  land  will  be  a  positive  rent,  and  will  enter  into  wheat  prices ; 
again,  the  worst  market-garden  land  competing  for  a  given  market 
may  be  tolerably  good  wheat  land,  and,  if  so,  the  rent  which  it  could 
get  for  wheat  forms  a  marginal  rent  for  market-garden  land.  So  as  we 
ascend  to  the  higher  and  more  special  uses  of  land,  we  find  that  the 
differential  rents  must  be  measured,  not  from  a  no-rent  margin,  but 
from  a  minimum  specific  rent  of  a  higher  and  higher  order,  until  we  get 
to  city  ground,  which  is  measured  from  a  minimum  which  must  exceed 
the  rent  which  that  land  could  obtain  for  the  best  agricultural  use  to 
which  it  could  be  put"   (pp.   120,   121). 

"For  the  sake  of  simplicity  I  have  assumed  that  the  marginal  rent 
is  directly  and  exactly  determined  by  the  alternative  use  of  the  worst 
land  in  cultivation  for  each  use.  But  this,  of  course,  is  not  necessarily 
the  case.  It  is  not  necessary  that  the  worst  land  should  have  an  alter- 
native use  :  it  may  be  some  better  land,  enjoying  a  differential  as  well  as 
a  marginal  rent,  which  occupies  that  position.  The  worst  wheat  land 
might  obtain  a  marginal  rent  of  20s,  per  acre  ;  superior  qualities  of 
wheat  land  might  take  higher  rents  rising  to  40^.  Suppose  that  some 
of  the  land  rented  at  30^.  had  another  use  which  would  yield  a  rent  of 
2gs. ;  it  is  evidently  this  land  which  fixes  the  marginal  rent ;  it  must 
receive  20s.  in  order  to  induce  it  to  contribute  to  the  wheat  supply, 
and  the  205.  taken  by  the  worst  land  measures  its  inferiority  of  wheat- 
growing  power  as  compared  with  the  305.  land.  It  is  possible  that  the 
20s.  land  might  continue  to  grow  wheat,  however  little  rent  was  paid  ; 
its  rent  is  directly  determined  by  the  cost  of  keeping  in  the  supply  of 
wheat  land  the  superior  land  at  30s.  In  such  a  case  it  will  be  the 
30s.   land    and    not    the    20s,   land    which    is   the   direct   determinant    of 


41 8  VALUE  AND  DISTRIBUTION 

Precisely  where  Hobson  finds  the  ultimate  forces  of 
causation  in  the  determination  of  the  price  of  wheat  is  not 
readily  made  out;  but  it  is  clearly  his  view  that,  on  the 
supply  side,  certain  of  these  land  hires,  or,  more  accurately, 
certain  portions  of  these  hires,  are  to  be  regarded  as  causes 
of  price  rather  than  results,  and  that  we  must  go  to  the 
market  price  of  the  land  use,  or  of  part  of  it,  in  order  to 
explain  the  price  of  the  product. 

But  (i)  how  are  these  price-determining  land  hires 
themselves  determined,  and  (2)  through  what  bearing  and 
in  what  sense  and  to  what  extent  are  they  price  causes  ? 

I.  The  determination  of  the  value  of  the  land  use  is 
held  to  be  in  principle  precisely  like  that  of  the  determina- 
tion of  the  price  of  consumption  goods,  in  the  sense,  that 
is,   that  both  are   market  adjustments   worked   out   under 

price  for  the  supply  side  in  the  market  for  sale  of  wheat-growing 
power"  (pp.  123,  124). 

"Now  what  about  the  20s.  land,  the  worst  wheat  land  in  occupa- 
tion? ....  It  is  quite  legitimate  to  suppose  that  the  owner  of  this 
land,  having  no  available  alternative  at  any  price  approaching  20s., 
might  have  been  willing  to  contribute  to  supply  even  if  ...  . 
the  rent  per  acre  ....  had  been  at  16^.  instead  of  20s.  In  such 
case  it  will  be  evident  that  it  is  the  owner  of  the  30^.  land  who,  in 
fixing  for  the  supply  side  the  price  per  unit  ....  determines  the 
amount  of  rent  per  acre  of  the  land  at  the  margin  of  cultivation" 
(P-    125). 

"The  determining  increment  of  supply  is  not  necessarily  identical 
with  the  worst  land  contributing  to  that  supply,  commonly  known  as 
the  margin  of  cultivation.  If  the  slackness  of  the  demand  for  wheat 
causes  a  fall  of  rent,  it  is  not  necessarily  the  20s.  land  which  passes 
out  of  cultivation  ;  it  may  be  the  30s.,  if  the  latter  has  an  alternative 
use  and  the  former  has  not.  The  actual  determination  of  rent  by  this 
method  is,  of  course,  complicated  by  the  fact  that  as  a  rule  not  merely 
one  part  of  the  land  supply,  but  many  parts  have  alternative  uses  to 
which  they  would  succumb,  were  the  price  for  one  use  to  fall  below  a 
certain  figure.  But  it  is  reasonable  for  us  to  assume  that  the  price  per 
unit  of  land  use  is  always  determined  by  the  common  position  of  one 
part  of  supply,  which  at  that  price  is  just  induced  to  contribute  toward 
that  supply  in  preference  to  some  others  ;  the  fact  that  at  a  different 
price  per  unit  some  other  land  would  occupy  this  position  need  not 
concern  us"  (pp.  127,   128). 

This  is  perhaps  the  opportune  time  for  presenting  a  resume  of  the 
different  rent  concepts,  and,  so  far  as  is  relevant  to  the  present  dis- 
cussion   Hobson's  system  of  terminology  with  regard  to  them  : 

Selecting  out  of  our  illustrative   scheme  the   30-hire  tract  or  acre 


ATTEMPT  AT  RECONSTRUCTION  419 

entrepreneur  bidding.  True,  the  consumption  good  receives, 
on  the  cost  side,  its  vakie  from  the  vaUie  of  the  instrument ; 
and  from  this  point  of  view  there  is  doubtless  a  distinction, 
in  that  the  vahie  of  the  cost  good — in  this  case  the  value 
of  the  land — is  not,  through  an  appeal  to  cost  fixation,  as 
readily  explained,  either  in  whole  or  in  part,  as  is  the 
value  of  the  consumption  good.  On  the  whole,  indeed,  the 
land  hire  appears,  as  we  have  seen,  to  be  in  part  derived 
from  price  and  in  part  a  determinant  of  price.  But  at  any 
rate,  as  a  question  purely  of  the  process  of  market  adjust- 
ment, there  is  a  complete  parallel  between  the  price  of  the 
land  use  and  the  price  of  the  finished  consumption  good : 

In  so  far  as  the  price  of  uses  of  factors  of  production  is  reached 
by  competition  and  bargaining  (and  this  is  our  hypothesis  through- 
out),  the  mode   of   determining  rent,   interest,   and   wages   will   be 


of  land,   the  rent  concepts  applicable  to  it  would   catalogue   as   follows  : 

1.  The  entire  hire,  30  shillings  ; 

2.  The  differential  hire  above  the  poorest  land  in  actual  use,  30 
minus,  say,  5=25  ; 

3.  The  differential  hire  above  the  poorest  land  in  use  in  the  par- 
ticular line  of  production,  30 — 20=10  ; 

4.  The  differential  hire  above  the  best  alternative  use,  30 — 30^0. 
(With  the  20  land  in  our  illustrative  scheme,  this  variety  of  differential 
is  evidently  i  :  on  the  cranberry  patch  of  our  earlier  discussions,  this 
differential  would  include  the  ehtire  hire.) 

"Now  since  it  is  convenient  to  retain  the  term  'margin  of  occu- 
pation or  employment'  to  describe  the  worst  or  least  efficient  part  of 
supply,  some  other  term  is  needed  to  mark  that  part  which  occupies 
the  determinant  place  in  any  given  market.  I  propose  to  speak  of  this 
portion  as  'the  determining  portion  of  supply,'  and  of  its  owner  as 
'the  determining  owner.'  The  worst  land  in  cultivation  for  a  particular 
supply  will  be  described,  in  accordance  with  usage,  as  'marginal  land,' 
and  its  rent  as  marginal  rent.  'Differential  rents'  will  be  the  rents 
obtained  by  lands  of  superior  productivity  contributing  to  this  supply, 
and  will  be  measured  from  the  margin"   (p.  129). 

But  upon  the  assumption,  actually  made  by  Hobson,  that  the  lands 
are  funded,  there  is  surely  no  occasion  for  ranking  any  of  the  lands 
as  worse  or  better  or  as  more  or  as  less  efficient  than  any  of  the 
others.  And  one  is  minded  to  ask  which  of  the  two  it  is,  the  30-hire 
land  or  the  owner  of  the  30-hire  land,  that  is  determinant ;  or,  after  all, 
is  it  not  the  30  of  product  displacement  that  is  determinant,  the  land 
hire  being  merely  the  competitive  expression  of  the  displacement? 
In  collectivist  production,  at  any  rate,  there  are  alternative  produc- 
tivenesses and   differential   productivenesses,   but  no   rents,   no   hires. 


420  VALUE  AND  DISTRIBUTION 

essentially  the  same  as  that  of  determining  the  price  of  horses  or 
wheat  (p.  126). 

But  precisely  because  the  consumption  good  is  a  good 
price-determined  through  its  costs,  it  must  be  recognized 
that  when 

goods  have  been  exchanged  for  goods,  ....  in  order  to  under- 
stand more  fully  the  nature  of  the  bargain,  we  must  regard  any 
two  commodities  which  have  been  exchanged  as  complexes  of  the 
various  quantities  of  the  factors  of  production  that  have  entered 
into  them  in  the  various  processes  of  production  (p.   113). 

This  serves  merely  to  emphasize  that  to  understand 
prices,  we  must,  on  the  supply  side,  with  reference  to  land 
costs,  determine  the  nature  and  quantity  of  the  rent-cost 
elements  in  price ;  and  thus  we  discover  that 

a  bargain  for  the  sale  or  the  exchange  of  finished  commodities 
will  depend,  as  far  as  supply  forces  are  concerned,  upon  the  con- 
ditions of  a  number  of  preceding,  underlying  bargains  for  the  use  of 
different  kinds  and  quantities  of  land,  capital,  and  labor  power 
(p.  113).  We  regard  the  hiring  of  the  factors  of  production  as 
equivalent  to  the  sale  of  their  use, 

and  thus  as  subject  to  all  the  possibilities  of  higgling, 
oppression,  and  forced  gains  (p.   114). 

Where  shall  we  be  able  to  isolate  a  rent  which  is  price- 
determining  in  its  entirety,  that  is,  without  adulteration  of 
any  price-determined  elements?  But  in  any  case,  what- 
ever rent  comes  to  be  selected  as  price-determining,  it 
must,  perforce,  be  a  rent  fixed  through  the  market  process 
of  competitive  entrepreneur  bidding  for  the  different  land 
uses.  And  it  is  also  to  be  understood  that  all  these  land 
uses  are  actually  sold  at  the  same  ratio  between  their  pro- 
ductivity which  they  offer  and  the  price  which  they  com- 
mand; that  is,  they  are  all  funded  into  units  of 
land-productivity  service : 

In  land,  wc  must  recognize  that  rent  or  price  of  land  use  is 
determined,  just  like  the  price  of  commodities,  by  the  relative  eco- 
nomic strength  of  buyers  and  sellers  bargaining  for  a  given  quantity 
of  land  use  and  not  for  a  given  sized  piece  of  land,  though  the 
language  of  these  proceedings  has  reference  to  the  latter.    The  sub- 


ATTEMPT  AT  RECONSTRUCTION  421 

jective  valuations  [ofTer  prices  and  refusal  prices]  of  a  single  owner 
and  a  single  tenant  (the  final  pair)  fix  the  limit  for  the  price  of  a 
unit  of  this  land  power,  the  stronger  of  the  two  fixing  the  price 
point   (pp.    126,  128) ." 

Adopting,  then,  the  supposition  that  "what  is  really  sold 
in  the  bargaining  between  land-owners  and  cultivators  for 
the  use  of  wheat  land"  is  not  merely  wheat-growing  power 
or  wheat-growing  land  but  wheat  land  "as  units  of  wheat- 
growing  power ;"  that  is,  recalling  that  the  land  supply  is 
conceived  as  a  fund  of  abstract  productive  units — we  turn 
to  examine  the  process  by  which  these  wheat-land  hires  are 
adjusted.  It  is  significant  that  for  this  purpose  Hobson 
appeals  to  the  concrete  and  actual  and  unfunded  supply  of 

^^  But  upon  an  earlier  page  (25),  the  criticism  against  the  "whole 
mathematical  treatment"  was  that  it  "rests  upon  the  assumption  of  an 

infinite    divisibility   of    supply The    fact    that    supply   is    not    in 

any  case  infinitely  divisible  impairs  the  practical  service  of  the  whole 
mathematical  treatment."  Thus  "it  is  easy  to  see  that  there  is  a  far 
greater  elasticity  in  supply  and  in  demand  in  a  corn  market  than  in  a 
horse  market,  a  far  greater  variety  of  possible  prices  with  a  far 
narrower  interval  between  them.  This  signifies  a  far  closer  and  more 
effective  competition  between  buyers  on  the  one  hand  and  sellers  on 
the  other,  the  result  being  that  the  limits  between  which  ordinary 
competition  breaks  down  are  much  narrower"  (p.  27).  But  surely 
competition  should,  then,  be  perfect  in  the  land  market,  upon  the 
assumption  that  it  is  really  funded  into  precisely  equal,  inter- 
changeable, abstract,  productivity  units.  The  truth  of  the  case,  how- 
ever, seems  to  be  that  Hobson  regards  land  as  funded  for  the  purposes 
of  cost  theory,  but  as  non-funded  for  the  purposes  of  "forced-gain" 
theory : 

"Wheat  or  wool  ....  will,  in  theory  and  usually  in  practice, 
rank  as  a  number  of  separate  supplies  subject  to  entrepreneur  bargain- 
ing ....  goods  which  are  held  to  be  identical  in  size  and  quality. 
Now  in  the  market  for  the  sale  of  the  use  of  labor  or  land  no  formal 
reduction  to  equal-sized  units  takes  place.  Though  the  real  object  of 
sale  is  a  quantity  of  productive  power  in  land  or  labor,  what  is 
nominally  bought   and   sold   is   the   use  of   so   many   acres   or   so   many 

laborers But     while    the    bargainers     express     themselves     in 

terms  of  acres  or  laborers,  the  real  object  of  their  bargain  is  the  use 
of  land  power  and  labor  power,  and  they  are  continually  engaged  in 
reducing  acres  and  laborers  to  units  of  productive  power  when  they 
buy  and  sell"  (p.  114). 

"It  is  admitted  [by  whom?]  that  what  is  really  sold  ....  is 
units  of  wheat-growing  power.  The  fact  that  the  nominal  subject  of 
bargain    is   acres   must   not   blind   us   to   this   undertruth"    (p.    125). 

If  so,  then  so  much  the  worse  for  forced  gains ;  but  Hobson  does 
not  so  see  the  case  : 

"It  is  the  owner  of  the  30J.  land  who,  in  fixing  for  the  supply  side 
the  price  per  unit  at  5s.,  determines  the  amount  of  rent  per  acre  of 
the    land     at    the    margin    of    cultivation" — the     20s.    land     (p.     125). 


42  2  VALUE  AND  DISTRIBUTION 

entrepreneurs  and  to  their  competitive  bidding  against  one 
another;  and  it  would  thus  seem  that  all  the  phenomena, 
forced  gain  or  other,  characterizing  the  price  fixation  of 
consumption  goods  must  equally  apply  to  production  goods ; 
this  is,  indeed,  Hobson's  view:  "If  we  regard  the  hiring 
of  the  factors  of  production  as  equivalent  to  the  sale  of 
their  use,  we  are  confronted  with  the  investigation  of  the 
market  for  the  sale  of  the  use  of  various  supplies  of  land, 
labor,  and  capital"  (p.  114). 

But,  if  so,  how  shall  productivity  be  funded  unless  also 
the  utility  in  every  particular  stock  or  series  of  commodities 
be  also  taken  as  funded?  This  view  must  find  its  argu- 
mentative basis — if  basis  it  have — in  some  sort  of  society- 
as-an-organism  doctrine.  And  what,  then,  becomes  of 
forced  gains? 

We  have  seen  that  it  is  the  30«?.-per-acre  land  which  is 
believed  to  determine  the  price,  that  is,  under  the  condi- 
tions as  assumed,  not  the  worst  land,  the  20^.  land,  but  the 
best,  the  305.  land,  this  latter  being  the  land  upon  the  alter- 
native margin : 

Suppose  that  some  of  the  land  rented  at  sos.  had  another  use 
which  would  yield  a  rent  of  2gs.;  it  is  evidently  this  land  that  fixes 

the   marginal    rent It    is    possible   that   the   20s.    land   might 

continue  to  grow  wheat,  however  little  rent  was  paid ;  its  rent  is 
simply  determined  by  the  cost  of  keeping  in  the  supply  of  wheat 
land  the  superior  land  at  30s.  In  such  a  case  it  will 
be  the  30s.  land  and  not  the  20s.  land  which  is  the 
direct  determinant  of  price  for  the  supply  side  in  the 
market  for  sale  of  wheat-growing  power  (p.  124).  The  argument, 
....  though  quite  valid  for  showing  that  differential  rents  do  not 
enter  into  price,  lets  into  price  any  rents  which  are  paid  for  the  use 
of  marginal  land  contributing  to  any  supply.  Land  may  be  graded 
according  to  its  economic  uses ;  the  differential  rents  will  be  included 
in  the  market  (and  even  in  normal)  prices   (p.  130). 

The  subjective  valuations  of  a  single  owner  and  a  single  tenant 
(the  final  pair)  fix  the  limits  for  the  price  of  a  unit  of  this  land 
power,  the  stronger  of  the  two  fixing  the  price  point.  This  done, 
the  rent  per  acre  is  determined  by  the  net  yield  of  land  power  in 
each  grade  of  land.  If  the  higgling  of  the  market  fixes  the  price 
of  a  unit  at  20s.,  the  best  land  available  for  that  supply  may  yield 
two  units  of  power  per  acre,  in  which  case  the  rent  per  acre  is  40s., 
the  worst  land  only  J/2  a  unit  with  a  rent  of  los.  per  acre  (p.  127). 


ATTEMPT  AT  RECONSTRUCTION  423 

But  if  this  is  true,  it  must  follow  that  all  lands  are 
equally  cheap  and  equally  dear ;  and  if  so,  all  talk  of  areas, 
or  of  acres,  or  of  tracts  of  any  sort  becomes  irrelevant,  1,000 
acres  of  poorer  land  being  both  the  price  equivalent  and  the 
productivity  equivalent  of  100  acres  of  a  better  grade  or  of 
10  acres  of  the  highest  grade.  This  funding  doctrine 
should,  then,  suffice  to  cancel  all  talk  of  marginal  lands  in 
any  sense  of  marginal  entrepreneur  cost,  or  in  any  other 
sense  than  that  of  the  nearness  of  the  wheat  land  to  the 
line  of  equal  desirability  for  some  alternative  use.  Under 
the  doctrine  as  presented,  all  lands  are  equally  expensive 
for  wheat  purposes,  and,  so  far  as  entrepreneur  outlays  or 
entrepreneur  grounds  of  interest  are  concerned,  neither  the 
20s.  land  nor  any  other  can  have  a  non-cost  element  in  its 
rental.  Here,  indeed,  it  becomes  clearly  manifest  that 
Hobson's  analysis,  unconsciously  collectivist  in  standpoint, 
really  involves  the  entire  abandonment  of  the  entrepreneur 
point  of  view. 

For  mark  how  this  manner  of  computing  entrepreneur 
costs  by  the  displaced  potentialities  of  the  instrumental 
goods  will  afifect  the  entrepreneur  computation  when  car- 
ried over  into  the  labor  and  capital  fields ;  for  it  is  to  be 
recalled  that  Hobson  protests  vigorously — and  rightly — 
against  "that  general  tendency  of  economic  science, 
especially  in  England,  ....  to  assimilate  the  theory  of 
the  sale  of  capital  use  and  labor  power  to  that  of  the  sale  of 
goods,  but  to  mark  off  the  sale  of  land  use  as  subject  to 
quite  other  economic  laws"  (p.  116). 

I  propose  to  bring  the  sale  of  the  factors  of  production  under 

the  general  laws  of  value  and  of  price For  this  purpose  it  is 

necessary  (i)  to  co-ordinate  the  three  factors  with  reference  to  the 
conditions  which  regulate  their  price;  (2)  to  show  that  their  sales 
are  in  essence  identical,  as  economic  processes,  with  the  sale  of  com- 
modities (p.   117). 

But  if  it  is  indeed  true  that  the  entrepreneur  will  reckon 
as  his  cost  not  his  wage  outlay,  or  some  alternative  open  to 
him  with  regard  to  the  application  of  his  expenditure,  but 
only  the  worth  of  what  the  laborers  could  respectively  pro- 
duce in  their  next  most  productive  lines  of  employment, 
and  if,  out  of  his  capital-hire  outlays,  the  entrepreneur  is  to 
be  allowed  to  compute  as  cost  only  such  part  of  this  expense 
as  represents,  say,  what  his  cotton  machinery  would  have 
produced  in  a  woolen  mill,  there  is  an  end  of  all  hope  that 


424  VALUE  AND  DISTRIBUTION 

any  entrepreneur  anywhere  will  ever  be  able  to  determine 
his  own  or  anyone's  else  cost  of  production  of  anything. 

The  full  significance  of  the  alternative-margin  analysis, 
as  presented  by  Hobson,  will  be  best  appreciated  if  put  in 
the  form  of  a  summary: 

1.  Through  the  determinant  power  of  the  margin,  we 
arrive  at  a  price-appraisal  of  5^.  per  unit  of  land  power, 
for  the  land  powers  in  the  marginal  land, — the  30^.  land,  a 
6-unit  tract. 

2.  By  reflection  from  this  price,  margin-fixed,  we  get 
the  same  price  for  all  other  equal  land  powers,  and  thereby 
a  funded  wheat-land-power  productivity. 

3.  This  marginal  land,  the  30.?.  land,  also  determines, 
on  the  land-cost  side,  the  price  of  wheat,  since  this  30^.  land 
was  at  the  alternative-use  margin,  and  held  the  position  of 
marginal-instrument  cost. 

4.  Having  fixed  the  wheat  price,  and  having  fixed  the 
rent  accruing  to  those  lands  not  themselves  price-determin- 
ing, this  marginal  land  (or  is  it  the  owner  of  the  marginal 
land?)  apportions  to  these  other  lands  their  supra-cost  dif- 
ferentials of  rent  income,  that  is,  their  rent  quantities  above 
their  necessary  (price-determining?)  rentals,  attributing 
thus  to  them, — in  our  illustrative  scheme, — price-determined 
rents  of  from^  up  to  {% .  These  price-determined  services 
from  non-determinant  lands  are  thus,  as  it  seems,  cheaper, 
for  cost  purposes,  than  the  services  of  lands  nearer  to  the 
alternative  use,  and  yet  the  lands  are  funded  into  equal 
productivity,  units. 

And  thus  it  appears  that  the  marginal-land  instrument, 
at  the  opportunity  margin,  is  determinant  and  strategic  to 
a  degree  not  before  appreciated  even  by  the  most  pro- 
nounced advocates  of  the  margin-fixation  doctrine. 

But  despite  the  fact  that  this  manner  of  analysis  makes 
impossible  the  entire  entrepreneur-cost  category,  it  still 
remains  unclear  whether  the  determinant  margin  is  pre- 
sented as  an  entrepreneur  margin  or  as  an  instrument  mar- 
gin.    The  supply  of  wheat  being  a  stock  of  similar  items, 


ATTEMPT  AT  RECONSTRUCTION  425 

its  price  was  determined,  on  the  demand  side,  not  by  the 
entire  demand  but  by  the  marginal  bidder,  on  the  supply 
side,  not  by  the  entire  supply  and  not  by  any  marginal 
entrepreneur  but  by  the  cost  of  production  upon  the  alter- 
native-use margin,  with  the  rent  for  this  alternative  use, — 
seemingly  a  rent  for  unfunded  land  powers, — functioning 
as  one  of  the  marginal  and  price-determining  costs.  The 
market  value  of  units  of  productivity  is  thereupon  fixed 
by  the  bidding  of  entrepreneurs  for  the  services  of  these 
units,  in  view  of  the  market  price  for  their  products.  But 
here  again  it  is  the  oivncr  of  the  laud  upon  the  alternative- 
use  margin — the  land  without  an  appreciable  wheat  differ- 
ential— who,  having  fixed  the  price  of  the  wheat,  now  in 
turn,  in  fixing  the  price  per  unit  of  land  use  at  ^s..  deter- 
mines the  amount  of  rent  per  acre  for  the  land  at  the 
margin  of  cultivation,  that  is,  the  per-acre  rent  of  the 
poorest  land  in  the  wheat  use ;  and  better  lands  thereupon 
obtain  their  differential  of  income  as  measured  from  this 
margin,  according  to  their  differentials  of  productiveness 
in  the  unit  schedule. 

,And  thus  it  is  on  the  whole  evident  why,  with  reference 
to  the  precise  nature  of  this  margin,  Hobson  says . 

Some  other  term  is  needed  to  mark  that  fact  which  occupies  the 
determinant  place  in  any  given  market.  I  prefer  to  speak  of  this 
portion  as  "the  determining  portion  of  the  supply"  and  of  its  owner 
as  "the  determining  owner"  (p.  128). 

Both,  then,  seem  to  be  detennining. 

But  there  are  other  difficulties : 

Whether  the  determinant  portion  of  supply  of  land  be  the  worst 
land  or  not  makes  no  difference;  the  price  of  land  power  and  so  the 
rent  of  different  qualities  of  land,  appears  to  be  directly  determined 
by  the  fact  that  some  of  the  land  has  an  alternative  use,  and  that  it 
may  refuse  to  contribute  to  the  supply  unless  a  certain  price  is  paid. 
But  though  the  alternative  price  ....  determines  a  lower  limit  of 
marginal  rent,  there  is  nothing  to  prevent  the  marginal  rent  rising 
higher  than  this.  If  the  30.?.  land  has  an  alternative  use,  it  is  pos- 
sible that  use  might  yield  only  25^.;  now,  though  the  owner  of  that 
land  would  consent  to  take  26s.  rent,  he  may  be  able  to  get  sos., 
because  there  is,  for  the  time,  an  absolute  scarcity  of  land  available 
for  this  supply.  In  a  word,  he  may  be  able,  as  the  final  seller,  to 
take  a  forced  gain  of  5^.,  which  corresponds  precisely  to  the  "forced 


426  VALUE  AND  DISTRIBUTION 

gain"  in  the  price  of  the  horse  in  our  analysis  of  a  market  for  com- 
modities. In  such  a  case  it  might  be  best  to  distinguish  the  5^.  from 
the  25s.,  and  to  class  it  as  a  third  form  of  rent  (p.  129)  . 

But  this  is  really  not  a  new — a  fifth — concept  of  land 
rent;  it  is  merely  a  landlord's  quasi-rent  subdivision  of 
concept    I. 

And  now  note  the  implications:  This  30^.  rent  upon 
land  having  an  alternative  use  of  only  2c,s.  becomes  the 
land-cost  determinant  of  the  market  price  of  wheat;  at  the 
same  time  the  cleverness  of  this  particular  landlord,  as 
achieving  in  bargaining  a  forced  gain  of  rent  for  his  own 
benefit,  has  enabled  him,  as  determinant  owner  of  the  mar- 
ginal land,  to  dictate  the  general  price  of  units  of  wheat 
productivity,  and  to  fix  this  price  for  all  the  different  lands, 
with  the  result  that  all  other  lands  as  well  as  his  own  are 
achieving  a  forced  gain  of  -/^  above  their  "lower  limit  of 
marginal  rent."  That  this  may  be  nonsense  is  not  to  the 
purpose;  to  deny  it  is  to  deny  to  the  marginal  land  (or  to 
the  inarginal  owner — which?)  the  determination  of  the 
price  of  products  and  the  general  rent  determination  for 
the  different  qualities  of  land ;  and  at  the  same  time  it  is  to 
deny  the  funding  of  land  into  productivity  units. 

But  now  as  to  the  precise  correspondence  of  these 
forced  gains  to  the  forced  gains  in  the  horse  market:  If 
there  is  the  alleged  correspondence,  it  is  so  much  the  worse 
for  the  horse  case ;  for  where  are  the  other  tenant  bidders 
that,  with  funded  lands — or  without — this  30^".  or  25.?.  land 
is  left,  with  its  c^s.  width  of  higgling-margin,  to  the 
bargaining  contest  of  this  marginal  pair?  Or  is  it  really 
assumed  that,  except  to  this  one  tenant  candidate,  the  land 
is  not  30^-.  land  in  point  of  desirability,  but  only  2^s.  land? 
But  this  would  be  to  disturb  the  funding  principle.  And 
if  the  land  is  really  30.?.  land  to  him  and  to  other  tenants 
generally,  if  only  they  would  act  upon  their  interests,  are 
the  55.,  over  and  above  the  25.?.  lower  limit,  really  forced 
in  the  sense  that  they  are  imjustly  gained  at  the  tenant  bar- 
gainer's expense?  Or  is  the  full  30,y.  the  fair  market  value 
of  the  value-producing  power  offered  for  sale,  so  that  at 
any  rent  less  than  30.?.,  there  would  be  a  forced  gain  for  the 
tenant  at  the  expense  of  the  landlord?  And  if  the  land 
were  worth  only  2^s.  to  other  cultivators,  but  30.?.  to  this 
one,  what  should  be  regarded  as  truly  and  justly  its  worth? 

The  validity  of  the  argument  from  the  intensive  mar- 


ATTEMPT  AT  RECONSTRUCTION  427 

gin  to  prove  the  non-cost  significance  of  land  hires  comes 
in  for  searching  examination  at  Hobson's  hands.  His  Hne 
of  reasoning  in  criticism  of  Mill  and  of  Marshall,  while 
perhaps  not  of  greater  interest  than  the  foregoing,  is  of 
considerably  greater  cogency. 

Not  overlong  insisting  upon  the  fact  that  the  argument 
which  at  the  intensive  margin  excludes  rent  from  cost  "can 
be  similarly  applied  to  show  that  interest  and  wages  do  not 
enter  into  price,"  Hobson  proceeds  to  the  discussion  of 
what  he  regards  as  the  fundamental  error  in  the  entire 
"dosing"  method  of  argument,  whether  one  or  another  of 
the  factors  of  production  be  taken  as  applied  in  the  dosin^g" 
fashion.  His  objection  goes  to  the  underlying  supposition 
that  any  one  of  the  three  factors  of  production  can  be  expe- 
diently and  economically  applied  as  the  sole  constituent 
of  the  expense  dose.  "The  truth  is  that  a  certain  har- 
mony of  combination  of  factors  exists  for  various  produc- 
tive purposes ;  ....  if  there  is  a  short  supply  of  one 
of  them  at  the  former  quality  and  price,"  one  or  both  of  the 
others  will  be  substituted, but  at  an  increased  cost  per  unit  of 
product ;  this  must  indicate  that  the  proportions  between 
the  factors  were  wrong;  it  would  have  been  better  to  have 
had  more  of  the  first: 

So  when  the  final  dose  of  capital  and  labor  on  a  given  piece  of 
wheat  land  achieves  a  product  which  yields  no  rent,  it  means  that 
with  the  same  quantity  of  land  use  as  sufficed  for  a  smaller  product, 
a  larger  quantity  of  capital  and  labor  use  has  been  combined ;  that 
as  no  more  land  use  was  employed,  none  was  paid  for  (p.  138)  . 

Or,  better : 

We  may  consider  a  piece  of  land  as  containing  various  land 
powers,  some  high,  some  low,  some  powers  so  low  that  they  require 
so  large  a  proportion  of  capital  and  labor  to  utilize  them  that  they 
only  just  pay  to  work.  These  low  natural  powers  yield  no  net 
economic  powers  of  production  (p.  138). 

The  cost  is  then  the  same  for  products  raised  upon 
non-marginal  land  powers  as  upon  the  intensive  margin, 
and  vice  versa,  since  upon  the  intensive  margin  so  much 


428  VALUE  AND  DISTRIBUTION 

more  capital  and  labor  cost  [non-land  cost,  entrepreneur- 
capital  cost]   is  incurred  as  the  land-rent  cost  is  less.^'^ 

Or  put  it  in  still  another  way : 

Suppose  it  [the  extra  product]  is  raised  by  a  tenant  farmer  as 
part  of  the  result  of  an  extra  last  hoeing  and  ploughing  on  his 
land,  it  [seemingly]  pays  extra  wages  but  no  rent;  if,  however, 
instead  of  this  extra  hoeing  and  ploughing  the  farmer  decided  to 
hire  one  more  acre  of  the  same  quality  of  land  and  spread  the  same 
amount  of  labor  power  over  the  larger  area,  the  product  of  this 

last  acre  pays  its  rent  but  no  wages The  labor  of  working 

the  ....  last  acre  of  land  is  certainly  remunerated  by  wages,  and 
at  the  same  rate  as  ...  .  the  other  acres.  Why,  then,  does  it  appear 
from  the  "dosing"  illustration  that  the  product  of  ...  .  the  last 
acre  pays  no  wage?     (P.  140.) 

"  No  question  can  be  raised  as  to  the  force  and  accuracy  of  this 
criticism  for  the  purposes  of  the  actual  issue  ;  but  it  is  none  the  less 
true  that  the  argument  is  not  quite  accurately  made.  There  is,  in 
fact,  no  best  combination  of  productive  factors  ;  each  entrepreneur  has 
doubtless  his  own  separate  best,  as  depending  upon  his  own  personal 
equation,  his  total  capital  equipment,  his  credit,  and  his  safe  limit  for 
using  credit.  But  for  each  entrepreneur  his  best  combination  is  a 
different  one  from  that  of  any  other  entrepreneur,  precisely  because  as 
entrepreneurs  they  are  different ;  and  with  each  entrepreneur  his  best 
combination  will  be  a  new  and  different  combination  with  every  change 
in  the  relative  costs  of  the  various  instnmients  and  agents.  Perhaps, 
however,  the  dosing  argument  might  avoid  the  entire  force  of  this 
general  line  of  attack  by  reformulating  the  dose  application  in  terms 
of  doses  of  expense — of  entrepreneur   outlay — as   applied   to   the   land. 

But  what  is  the  size  of  the  economic  "dose"?  Is  there  an  inten- 
sive margin  to  the  extensive  margin  of  land  ? 

If  every  other  sort  of  land  has  its  intensive  margin,  so  must  also 
the  poorest  of  cultivated  land  and  the  poorest  of  pasture  land ;  the 
pastured  cattle  are  in  themselves  capital  doses.  Absolutely  no-rent 
land  must  then  be  land  receiving  only  infinitesimally  small  outlays  of 
expense:  Unless  (i)  marginal  land  does  not,  for  the  earlier  doses  of 
expense,  fall  within  the  law  of  diminishing  value  returns  ;  in  this  case 
and  up  to  this  limit,  the  "doses"  should  rather  rank  as  together  consti- 
tuting one  dose;  or  (2)  unless  there  is  a  limit  of  another  sort  to  the 
subdivision  of  expense  doses,  a  long-time,  a  season,  or  employment 
unit,  adequate  in  point  of  amount  to  the  duration  of  the  undertaking 
in  hand,  and  to  the  nature  of  the  undertaking  in  hand  ;  the  first  unit 
dose  must  at  any  rate  be  large  enough  to  make  practicable  the  under- 
taking of  the  business,  its  size  and  the  time  involved  in  obtaining 
results  both  being  considered. 

But  in  any  case  the  dose  is  not  a  capital-goods  dose  or  a  labor 
dose  but  an  entrepreneur-capital  dose,  a  matter  of  quantum  of  expense 
rather  than  of  the  nature  or  the  detail  of  the  technological  means  or 
other  means  selected. 


ATTEMPT  AT  RECONSTRUCTION  429 

And  why,  also,  when  an  extra  dose  of  labor  is  applied  to 
the  land,  assume  that  all  the  increase  in  product  goes  to 
remunerate  the  larger  quantity  of  labor?  If  it  be,  indeed, 
true  that  more  labor  can  now  be  applied  to  the  land,  why 
was  it  not  before  applied?  The  rent  that  was  being  paid 
before  was  paid  on  the  basis  of  what  the  land  was  worth 
under  proper  utilization ;  and  when  it  now  comes  to  be  so 
utilized  and  comes  to  produce  what  it  ought  all  the  while 
to  have  been  producing,  the  belated  increase  in  product  is 
not  to  be  regarded  as  due  in  its  entirety  to  the  new  labor 
but  also  in  part  to  the  opportunity  now  belatedly  utilized : 

If  a  tenant  hires  a  piece  of  land  and  puts  five  doses  of  capital 
upon  it  when  he  ought  to  have  put  six,  he  pays  a  rent  based  upon 
the  supposition  that  he  will  make  a  full  economic  use  of  the  land, 
i.e.,  that  he  will  put  six  doses  on  it.  If,  discovering  his  error,  he 
afterward  adds  the  sixth  dose,  he  only  appears  to  pay  no  rent  out  of 
its  produce,  because  he  has  all  the  while  been  paying  a  rent  based 
upon  the  supposition  that  he  was  working  his  land  with  six  doses 
(p.   141). 

The  land  use  is  thus  the  basis  of  part  of  the  price-deter- 
mining cost ;  true,  no  more  is  now  being  paid  for  the  land 
than  was  before  paid,  but  the  price  now  being  paid  for  a 
utilized  land  service  was  before  being  paid  for  a  non- 
utilized  service ;  one  does  not  have  to  pay  more  for  the 
land  when  adequately  supplied  with  labor  and  capital  than 
before  when  it  was  inadequately  supplied : 

If  I  rent  a  piece  of  land  in  Picadilly,  in  which  all  houses  are 
three  or  four  stories,  the  rent  I  shall  pay  will  take  into  consideration 
the  capacity  of  the  ground  for  building  a  three-  or  four-story  house. 
If  I  choose  to  put  a  one-story  house  upon  the  ground,  the  rent  I 
pay  will  be  the  same  as  if  I  had  more  fully  utilized  the  site.  If  I 
afterward  add  stories,  it  will  seem  that  I  pay  no  rent  for  this  extra 
accommodation,  but  in  reality  I  have  been  paying  it  all  the  time 
(p.  142). 

Hobson's  argument  here  appears  to  be  unanswerable 
for  the  issues  as  they  must  present  themselves,  if  "doses" 
are  to  be  regarded  as  doses  of  the  separate  productive 
factors,  rather  than  as  doses  of  entrepreneur  capital  applied 
in  every  case  under  the  direction  of  individual  and  peculiar 
entrepreneur   initiative.      The   different   entrepreneurs    are 


430  VALUE  AND  DISTRIBUTION 

bidding  for  the  use  of  entrepreneur  capital — money,  or 
goods,  or  credit,  each  in  terms  of  money — or  of  instru- 
mental or  other  goods  as  reduced  to  the  money  denomina- 
tor, and,  as  such,  making  part  of  the  entrepreneur  fund  of 
capital.  Each  entrepreneur  bid,  whether  for  entrepreneur 
capital,  or  for  instrumental  goods  reduced  to  terms  of  entre- 
preneur capital,  is  never  accurately  a  bid  to  get  more  of 
anything  to  put  with  his  land  or  his  capital  goods  or  his 
employed  labor,  but  rather  to  put  with  his  entire  situation 
as  a  whole,  with  his  productive  complex  as  an  aggregate,  in 
which  he  himself  is  a  part.  Thus,  one  entrepreneur  will 
be  directing  his  capital  funds  to  the  hire,  or  purchase,  of 
machinery,  another  entrepreneur  to  the  hiring  of  labor, 
another  to  renting  land  or  more  land,  another  to  the 
purchase  of  fertilizers,  or  of  barns,  or  work  cattle,  or  dairy 
cattle,  or  for  insurance  outlays,  or  advertising,  or  taxes,  etc. 

And  out  of  all  the  entrepreneur  activities  in  the  supply 
of  agents  and  instruments,  and  out  of  the  entrepreneur 
competitions  for  the  control  of  these  agents  and  instru- 
ments, there  undoubtedly  come  about  market  values  for  the 
raw  materials,  hires  for  the  instruments  and  agents,  a  rate 
of  time  discount  upon  business  capital,  and  a  capitalization 
for  such  of  the  productive  facts  as  are  susceptible  of 
capitalization. 

Nothing,  however,  so  far  adduced  denies  that  the  entre- 
preneur in  making  his  bids  proceeds  upon  what  is  essen- 
tially the  dosing  method,  if  only  the  capital  nature  or 
capital  denominator  of  his  method  be  recognized.  But 
even  under  this  interpretation,  Hobson  is  right  in  insisting 
that,  in  accurate  analysis,  neither  the  entrepreneur's  maxi- 
mum bidding  disposition  nor  his  actual  price  outlay  is 
based  upon  or  expresses  any  separate  and  specific  produc- 
tivity of  the  dose  fact  under  consideration.  Any  separate 
productivity  of  this  sort  the  entrepreneur  himself  could 
not  isolate.  He  needs  the  fact  in  question  to  go  along  with 
his  aggregate  situation,  his  entrepreneur  complex,  and  to 
become  a  constituent  part  of  it ;  he  can  easily  compute 
what  he  can  afford  to  pay  for  the  accruing  advantages,  due 
in  part  to  the  independent  productivity — if  there  be  any — 
which  the  new  fact  bears  in  its  own  right,  in  part  to  its 
added  productivity  in  its  new  setting,  in  part  also  to  the 
added  productivity  which  the  old  facts  take  on  in  their 
new  association  and  relationship ;  so  far  as  the  productivity 
is  a  matter  of  the  interrelations  of  the  different  parts  in 


Attempt  at  reconstruction  431 

the  entrepreneur  complex — the  entrepreneur  being  himself 
a  part  thereof — and  a  matter  of  the  organization  of  the 
complex,  there  is  a  productivity  which  defies  any  attempt  at 
distribution. 

It  remains  true,  however,  that  the  entrepreneur  can 
readily  tell  hozv  much  he  zvould  if  necessary  pay,  and  how 
much  he  must  pay,  and  this  is  all  that,  in  this  aspect,  is 
necessary  for  the  validity  of  the  dosing  argument. 

"But,"     Hobson     says,     "the     'dosing'     illustration     is 

vitiated   by   a  more    fundamental   flaw We  may 

suppose  that  he  [the  laborer]  is  in  full  knowledge  of  the 
facts  and  has  a  full  exercise  of  choice ;  as  a  consequence, 
he  estimates  that  it  just  pays  him  to  work  five  looms  instead 
of  four"  (pp.  142,  143).  Why  say  that  the  fifth  loom  pays 
him  less  or  produces  less  or  adds  to  his  wage  less  than 
any  other  one  loom  out  of  the  earlier  four?  "The  fifth 
loom  after  it  is  added  is  found  to  be  just  as  productive  as 
any  of  the  other  four  looms.  The  answer  is  plain.  The 
fifth  loom  only  just  pays  because  its  addition  has  injured 
his  work  with  the  other  four  looms."  That  is,  each  of  the 
later  stock  is  producing  less  than  each  of  the  earlier  stock 
produced  before,  but  any  one  item  of  the  present  stock 
produces  now  as  much  as  any  other  one  item  produces  now. 

That  all  this  is  true  may  be,  and  must  be,  admitted ;  but 
here  again,  there  is  doubt  whether  the  argument  is  to  the 
purpose  as  disturbing  the  dosing  method.  Let  it  be 
assumed  that,  to  the  four  looms,  500  in  product  was  to  be 
attributed,  125  for  each  loom;  but  that  with  the  five  looms 
only  600  of  product  is  obtainable,  120  per  loom.  Surely  it 
is  not  true  that  in  this  second  case  the  first  four  looms  are 
to  be  credited  with  a  return  of  125  each  and  the  fifth  loom 
with  a  return  of  only  100.  Under  the  new  situation  all  are 
producing  equally.  Hobson  is  certainly  right  here.  But 
it  is  nevertheless  true  that  the  productivity  of  the  fifth 
loom,  120,  is  achieved  only  on  terms  of  reducing  the  produc- 
tivity of  each  of  the  four  looms  from  125  to  120,  with  the 
result  that  the  net  advantage  from  having  this  fifth  loom 
with  its  120  of  productivity  is  only  100;  this  100  is,  then, 
all  that  can  at  the  outside  be  paid  as  the  price  of  the  value 
increase  accruing  to  the  whole  situation  by  virtue  of  the 
hiring  of  the  fifth  loom. 


432  VALUE  AND  DISTRIBUTION 

The  next  objection,  the  third  so  called,  is,  in  truth,  not 
another  objection,  but  merely  another  aspect  of  the  first; 
as  such,  it  must  be  accepted  as  tenable,  but  this  only  in 
view  of  the  precise  manner  in  which  the  issues  in  the 
discussion  have  defined  themselves : 

Professor  Marshall,  in  treating  the  marginal  dose  of  labor  in 
agriculture  (e.g.,  the  last  hoeing  applied  to  a  field),  admits  that 
"the  return  to  that  last  dose  cannot  be  separated  from  the  others," 
but,  he  adds,  "we  ascribe  to  it  all  that  part  of  the  produce  which  we 
believe  would  not  have  been  produced  if  the  farmer  had  decided 
against  the  extra  hoeing"   (Book  IV,  chap,  iii,  p.   144,  par.   2). 

Marshall's  argument  must  be  admitted  to  be  unfortu- 
nate; to  make  the  best  case  for  it,  it  is  necessary,  Hobson, 
believes,  to  state  the  thing  affirmatively  rather  than  nega- 
tively, the  question  not  of  what  would  be  forfeited  by  the 
loss  of  one  item  out  of  the  existing  stock,  but  of  what 
would  be  gained  by  the  addition  of  another  item.  As  the 
expense  computation  is  forward-looking  so  must  also  the 
return  computation  be  forward-looking. 

But  Hobson,  in  condemning,  like  Wieser  before  him, 
Marshall's — as  also  later  Clark's  and  Carver's — ^backward- 
looking,  negative  method  of  value  imputation  to  productive 
agents,  fails,  like  Wieser,  to  see  that  no  ultimate  conclusion 
is  thereby  established.  Wieser  had  somehow  deduced  the 
tenability  of  the  forward-looking  addition  method ;  Hobson 
infers  the  impossibility  of  any  separate  value  imputation  of 
any  kind : 

Where  it  is  essential  to  productivity  that  land,  capital,  and  labor 
shall  all  co-operate,  it  is  impossible  to  assign  to  any  one  of  them  a 
product  based  upon  the  supposition  of  a  separate  productivity.  Simi- 
larly, where  there  exists  a  necessary  organic  quantitative  relation 
between  the  factors,  no  separate  product  can  be  put  down  to  any 
single  dose  of  each  (p.  147). 

But  that  this  is  true  of  the  concrete  commodity  product 
does  not  necessitate  the  conclusion  that  it  is  true  of  the 
value  product;  and  Hobson  himself  appears  to  assert  that 
the  increase  of  product  at  the  margin  or  under  the  margin 
is  due  to  the  capital  or  to  the  labor  application,  since  no 
valuable  use  of  land  is  actually  employed. ^^ 

"  As  has  already  been  argued,  and  as  will  later  more  fully  appear, 


ATTEMPT  AT  RECONSTRUCTION  433 

But  that  entrepreneurs  do  actually  bid  not  only  for 
additional  supplies  of  competitive  business  capital,  entre- 
preneur capital,  but  also  for  different  agents  and  instru- 
ments of  productions — these  all  the  while,  however,  reduced 
to  terms  of  capital  outlay,  and  so  ranking  under  the  com- 
mon denominator  computation  of  entrepreneur  cost — must 
still  be  admitted ;  and  this  leaves  the  dosing  principle  good 
for  all  that,  in  the  present  connection,  the  rent-cost  prob- 
lem, it  was  ever  supposed  to  be  good  for.  The  real  difficulty 
with  the  dosing  principle  is  in  the  attempt  to  apply  it  in 
terms  of  the  traditional  categories  of  productive  factors. 
The  tripartite  division  is  altogether  inadequate  to  the  case. 

But  to  acquiesce  in  the  dosing  principle  as  an  entrepre- 
neur method  of  computation  is  not  of  necessity  to  concur 
in  the  conclusion  that  all  rents,  or  any  particular  class  or 
subclass  of  land  rents,  must  be  excluded  from  price-deter- 
mining entrepreneur  costs ;  in  truth,  the  dosing  method  is, 
in  entrepreneur  computations,  serviceable  with  reference  to 
expenses  in  general,  or  with  reference  to  any  particular 
direction  of  expense.  Thus  we  are  constrained  to  deny 
that  "the  net  result  of  this  argument  is  that  the  application 
of  the  law  of  rent  to  the  intensive  cultivation  of  a  single 
factor  must  be  rejected  as  fallacious,"  but  we  none  the 
less  agree  that  the  argument  is  fallacious  as  used  to  show 
that  any  form  of  land  rent  is  irrelevant  to  the  process  of 
price  fixation. 

THE  VARIOUS   RENTS   IN   THEIR   RELATION   TO  VALUE 

Hobson  argues,  as  did  earlier  Say,  and  as  does  later 
Fetter,  that  although  land  and  labor  are  commonly  regarded 
as  having  concrete  forms,  we  are  prone  to  regard  the  pay- 
ment for  the  use  of  capital  as  payment  for  the  use  of  a 
money  value  of  a  certain  volume.  But  Hobson  insists  that 
if  any  common  law  of  price  or  of  value  is  to  be  worked  out, 
both  land  and  labor  must  be  subjected  to  the  abstract-value 

Hobson's  position  is  in  fact  correct  with  regard  to  the  value  product ; 
but  the  argument  under  consideration  falls  a  good  way  short  of  prov- 
ing this.  However,  in  a  paper  published  in  the  September,  1904, 
number  of  the  Journal  of  Political  Economy,  Hobson  has  presented 
a  much  more  searching  and  in  many  respects  a  satisfactory  analysis 
of  this  question.     See,  later,  chap,  xxii,  p.  476,  note. 


434  VALUE  AND  DISTRIBUTION 

measurement  as  cost  values,  or  capital  must  be  conceived  as 
concrete  forms  of  wealth  serviceable  in  production : 

The  actuality  of  a  science  of  industry  as  distinguished  from  a 
science  of  finance  requires  us  to  take  the  latter  course,  and  to  treat 
capital  as  consisting  not  in  money  but  in  concrete  forms  of  wealth 
serviceable  in  production  (p.  151). 

That  one  and  the  same  treatment  must  be  accorded  to 
all  productive  agents  and  instruments  ought  to  be  accepted 
as  past  doubt,  and  it  is  to  be  counted  to  the  especial  honor 
of  Hobson  and  Clark  that  they  are  first  among  modern 
economists  to  accept  and  to  emphasize  this  fact,  and  are 
still  almost  alone  in  this  acceptance  and  emphasis.  But  in 
point  of  fact  the  uses  of  labor  and  the  uses  of  land  do  attain 
a  value  statement  as  everyday,  commonplace,  cost-value 
items  in  the  entrepreneur-cost  computation.  Hobson,  indeed, 
has  himself  gone  so  far  as  to  reduce  these  land  uses  to  an 
abstract  fund  of  productivity  units.  Other  economists  have 
attempted  a  similar  form  of  funding  for  labor  and  capital, 
based,  it  may  be  assumed,  upon  the  evident  reduction  of 
all  of  their  productive  services  to  the  common  denomina- 
tor of  market  price. 

But  there  need  be  no  disappearance  of  these  separate 
and  concrete  existences,  through  the  mere  fact  that  all 
arrive  at  the  common  denominator  of  exchange  relations  in 
market  price.  And  the  fact  that  the  customs  and  legal  insti- 
tutions of  modern  society  deny  any  capitalized  value  to  the 
laborer,  as  distinguished  from  the  daily  putting-forth 
of  his  labor  power,  need  cause  no  perturbation ;  the  labor 
use  expresses  itself  in  value  precisely  as  do  land  uses  and 
capital-goods  uses.  And  the  land,  in  receiving  not  merely 
a  rental  value  but  a  capitalized  value,  remains  despite  that 
fact  none  the  less  concrete.  So  there  is  at  this  point  no 
especial  occasion  for  Hobson  to  insist  upon  the  concrete- 
ness  of  capital  goods,  and  particularly  no  occasion  for  car- 
rying this  insistence  so  far  as  to  call  for  the  abandonment 
of  the  market-value  expression  of  the  capital  goods  and  of 
their  productive  services.  But  this  latter  course  is  the  one 
chosen,  most  unfortunately,  by  Hobson ;  thereby,  as  it 
seems,  he  is  compelled  to  abandon  the  common  "business 
valuation  of  all  capital  as  a  valuation  based  upon  the  rate 

of  interest No  relation  is  possible  between  this 

capital  and  our  other  factors  of  production.  We  must  deal 
with  the  concrete  forms  which  are  thus  valued"  (p.  152). 


ATTEMPT  AT  RECONSTRUCTION  435 

And,  as  it  seems,  he  makes  both  unintelHgible  and  impos- 
sible his  earHer  notion  of  land  as  an  abstract  fund  of  value- 
productive  units. 

Land  and  capital,  Hobson  urges,  require  no  rent  or 
interest  for  purposes  of  upkeep ;  there  are  indeed  vtpkeep 
charges,  but  all  charges  of  this  sort  are  met  before  the  net 
income  can  be  computed  or  be  capitalized  into  present 
worth.  But  it  takes  some  wage  to  maintain  labor  in  exist- 
ence. "Thus  it  comes  to  pass  that  while  the  margin  of 
land  is  no-rent  land,  the  margin  of  capital  no-interest  capi- 
tal, the  margin  of  labor  is  (say)  15.?.  labor."  But  "this  i^s. 
wage  does  not  in  any  sense  correspond  to  interest  or  rent. 
It  is  simply  a  w^ear-and-tear  fund  of  labor,  the  expenditure 
necessary  to  replace  the  labor  power  given  out  in  a  day's 
work   and   to   maintain   the    laboring   population    at   their 

present   numbers   and    at   their   present   capacity 

It  is  wages  above  i^^s.  that  correspond  to  positive  rent  and 
interest :"  and  the  fact  that,  unlike  land,  labor  and  capital 
have  no  sub-marginal  representatives  does  not  impair  the 
setting;  for  there  is  a  fund  of  capital  safe  to  become  actual 
if  the  rate  of  interest  calls  for  it  [but,  one  infers,  not  safe  to 
relapse  into  non-existence  if  interest  again  falls],  "while 
any  rise  of  payment  to  the  marginal  i^s.  labor  will  increase 
the  supply  of  labor  power,  either  by  raising  the  population 
rate  or  by  improving  the  efficiency  of  labor,  or  by  both" 
(PP-   I55>   156).'' 

"'  "Whether  it  be  true  or  not  that  the  prospect  of  obtaining  interest 
is  a  necessary  motive  to  induce  the  creation  of  capital,  it  may  dis- 
tinctly be  affirmed  that  interest  is  not  necessary  to  secure  the  economic 
maintenance  of  forms  of  capital  that  have  been  brought  into  existence" 
(P-  153)'  Not  so;  there  is  needed  the  same  inducement  to  prevent 
deterioration  of  the  land,  or  of  the  capital,  or  the  slow  consumption  of 
either  that  was  needed  to  induce  the  creation  or  the  improvement. 
Upkeep  is  a  new  capitalization ;  if  rent  or  interest  only  cover  this 
charge,  there  is  nothing  left  to  overcome  the  abstinence  protest  against 
the  postponed  consumption  involved  in  holding  the  wealth  as  instru- 
mental or  intermediate  goods.  But  it  is  fairly  to  be  inferred  that  all 
forms  of  positive  upkeep  either  of  land  or  of  capital  are  reckoned 
by  Hobson  as  within  costs.  But  here  again  it  must  be  noted  that  since 
the  upkeep  requirement  applies  to  land  equally  with  capital,  there  is 
with  land  the  same  opportunity  for  abstinence  and  the  same  elasticity 


436  VALUE  AND  DISTRIBUTION 

And  now  to  the  question,  What  payments  for  use  of 
land,  capital,  labor,  enter  as  elements  into  market  price  of 

goods?  it  is  replied  that — 

the   same   reasoning  which   shows   that   differential    rents   of   land 

need  not  enter  price  shows  also  that  differential  payments  for  capital 

and  labor  need  not  enter  price Just  as  rent  of  land  need  not 

form  an  element  of  cost  or  price  in  agricultural  produce,  some  of 
which  is  raised  on  no-rent  land,  so  interest  need  not  figure  in  the 
cost  or  price  of  manufactured  goods,  some  of  which  are  produced 
by  no-interest  businesses,  while  similarly  no  cost  of  labor  above  the 
15^.  depreciation  fund  need  enter  into  the  price  of  commodities 
partly  produced  by  marginal  laborers   (p.  157)  ■ 

It  might,  therefore,  it  is  urged,  be  true  that  price  should 
be  determined  by  the  cost  upon  no-rent  land,  cultivated  by 
farmers  obtaining  no  interest  from  their  capital,  and  pay- 
ing only  a  bare  subsistence  wage  to  their  laborers : 

But  normally  the  last  and  most  expensive  portion  of  supply 
which  rules  the  supply  price  will  not  be  produced  under  conditions 

which  exclude  all  rent  and  profit It  will  be  more  likely  that 

the  last  portion  of  the  supply  will  be  produced  partly  on  no-rent 
land,  but  paying  an  interest  on  capital  and  perhaps  a  wage  far  above 
15^.,  partly  by  tenant  farmers  paying  rent  but  earning  no  interest  on 
invested  capital,  partly  by  peasants  paying  rent  or  mortgage  interest, 
but  living  on  a  bare  subsistence  wage.  [And  so]  if  the  history  of 
the  most  expensive  portion  of  a  wheat  supply  could  be  closely 
traced,  it  might  well  be  found  that  some  quarters  of  it  were  raised 
on  no-rent  land,  others  on  no-profit  capital,  others  on  subsistence 
wages;  but  that  an  average  quarter  of  this  most  expensive  portion 
contained  some  element  of  rent  or  interest  or  higher  wage,  or  all 
three.  .[And  so  we  get  as  the  determinant  of  price  a  cost]  not  neces- 
sarily the  minimum  of  rent  interest  and  wages,  but  the  lowest  aver- 
age    combination     of     the     three Differential     expenses     of 

of  supply,  in  kind  if  not  in  degree,  as  with  capital.  And  from  the 
point  of  view  of  the  individual  calculation,  either  is  immediately 
consumable  since   either  may  by  sale  he   turned   into   immediate  cash. 

As  to  the  1 55.  necessary  upkeep  for  labor,  it  is  to  be  said  that 
whether  or  not  it  may  apply  as  a  long-time  population  doctrine,  it  is 
entirely  irrelevant  as  a  business — a  financial — consideration  to  any  entre- 
preneur producer.  One  can  afford  to  deteriorate  his  laborers  where  he 
could  not  his  slaves  or  his  ox  ;  his  laborers  are  not  his.  And  note  that 
the  hirer  of  any  agent  has  not  the  slightest  interest  to  ask  how  much  of 
his  payment  is  for  rent  or  interest  and  how  much  for  upkeep;  the  pay- 
ment is  in  any  case  equally  a  hire  and  an  expense. 


ATTEMPT  AT  RECONSTRUCTION  437 

production  above  this  composite  limit,  whether  they  be  rent,  interest, 
or  wages,  will  not  enter  into  the  market-price  of  the  supply 
(pp.   158,   159)- 

Probably  the  fitting-  course  for  one  who  altogether  fails 
to  imderstand  is  to  ask  questions :  What  "last  portion"  is  it 
which,  being  price-determining,  yet  divides  into  "parts"  or 
"portions"  raised  under  all  possible  forms  of  co-operation 
of  productive  agents,  by  "numbers  of  farmers  working 
under  widely  different  conditions,  some  in  old,  some  in  new 
countries,  ....  some  quarters  raised  on  no-rent  land, 
others  on  no-profit  capital,  others  on  subsistence  wages"? 
And  even  assuming  that  any  portion  of  demand  or  of  sup- 
ply, or  any  possible  pair  of  traders,  could  determine  the 
price,  what  has  the  sort  of  composite  presented, — if  any 
such  there  could  possibly  be, — to  do  with  price  fixation? 
And  if  somewhere  there  were  found  a  man  working  on 
good-for-nothing  land,  and  with  valueless  appliances  in 
the  hands  of  laborers  paid  at  precisely  the  cost  of  their 
keep,  what  warrant  would  there  be  for  assuming  that  this 
man's  cost  would  either  fix  or  be  the  market  price?  Why, 
if  his  employees  were  exceptionally  efficient  men,  but 
grossly  wronged  under  some  forced-gain  relationship  or 
contract  should  not  this  exceptional  farmer  be  making  an 
especially  and  obnoxiously  high  rate  of  profits?  Or,  on  the 
other  hand,  is  there  anything,  except  that  he  has  nothing  to 
lose,  to  prevent  his  making  serious  losses?  And  why 
should  we,  as  the  seeming  beginning  and  occasion  of  all  our 
troubles,  have  started  with  the  assumption  that  good-for- 
nothing,  powerless,  no-rent  land  is,  for  economic  purposes, 
land  at  all,  or  that  rickety,  payless,  valueless  hay- 
rakes  are  capital  at  all  merely  by  the  fact  of  being  in  con- 
crete guise  and  in  the  similitude  of  farm  machinery?  And 
is  it  true  that  "the  15^'.  wage  does  not  in  any  sense  corre- 
spond to  interest  or  rent"?  For  is  there  not  at  any  rate 
this  much  of  correspondence,  that,  under  competitive  con- 
ditions, each  productive  agent  gets  recompensed  in  some 
approximation  to  its  efficiency  in  the  process  of  value  pro- 
duction ? 

Or  if  it  be  answered  that  this  determining  cost  and 
this  determining  unit  or  portion  of  the  supply  are  not  the 
cost  or  the  supply  of  any  one  man  or  of  any  one  place, 
whose  then  are  they,  and  zvhere  are  they?  And  if  they 
need  be  of  no  one  place,  need  they  be  of  some  one  particular 
time,  and  why,  or  why  not?    And  if  they  are  some  sort  of 


438  VALUE  AND  DISTRIBUTION 

an  average  compounded  of  different  marginal  producers 
anywhere  and  everywhere,  how  compute  supply  as  elastic 
through  some  composite-man's  processes  and  choices? 
And  of  whose  psychological  processes  could  it  be  true  that 
only  i5J.-per-day  labor  would  be  computed  as  cost?  That 
"the  law  of  substitution  has  always  to  be  taken  into  account" 
can  rightly  mean  not  that  the  actual  rents  and  wages  and 
interest  are  to  be  omitted  from  costs,  but  only  that  by  so 
much  as  the  cost  expense  in  one  or  another  of  these  direc- 
tions is  less,  by  so  much  must  it  be  more  in  the  others ; 
excepting  for  differences  in  entrepreneurs  all  the  different 
items  of  one  supply  would  have  the  same  cost. 

And  as  with  land  and  rent,  so  with  labor  and  wages; 
that  the  better  lands  are  more  highly  paid  than  the  poorer, 
or  that  the  best  laborers  receive  higher  wages  than  the 
poorest,  has  no  significance  for  the  question  of  costs ;  there 
is  no  reason  to  suppose  that  any  grade  of  agents  or  instru- 
ments is  better  or  worse  paid  than  any  other,  in  proportion 
to  the  efficiency  rendered.  The  cheaper  lands  or  the  low- 
paid  laborers  are  as  dear  at  the  price  as  the  better.  Inter- 
laborer  rents,  like  land  differentials,  have  no  relevancy  to  the 
cost  problem.  If  the  i5^.-man's  wages  enter  into  price,  so 
must  the  20s.,  that  a  man  ^  as  efficient  gets,  enter  into  price, 
and  this  to  the  extent  not  of  15,?.  only,  but  for  the  full  20s. 
And  as  with  the  better  lands  so  with  the  better  laborers  or 
the  better  entrepreneurs ;  the  best,  as  easily  as  the  poorest, 
may  be  nearest  to  the  margin  of  alternative  occupation ;  but 
not  the  outlay,  were  it  less,  nor  any  collectivist  reckoning 
of  some  alternative  concrete  product,  but  the  outlay  as  it  is, 
has  significance  for  the  purposes  of  competitive  cost. 


CHAPTER  XXII 

DISTRIBUTION  BY  VALUE  PRODUCTIVITY:     CLARK 

The  central  thesis  of  Professor  Clark's  Distribution  of 
Wealth^  is  that  the  different  distributive  shares  are  the 
correlatives  of  productive  efficiency,  and  that  under  static 
conditions  and  with  frictionless  competition  these  shares 
would  be  accurately  correlative.^     As  corollaries  from  this 

^  John  Bates  Clark,  The  Distribution  of  Wealth,  a  Theory  of 
Wages,  Interest  and  Profits,  New  York,  Macmillan,    1899. 

^  "It  is  the  purpose  of  this  work  to  show  that  the  distribution  of 
the  income  of  society  is  controlled  hy  a  natural  law,  and  that  this 
law,  if  it  worked  without  friction,  would  give  to  every  agent  of  pro- 
duction the  amount  of  wealth  which  that  agent  creates.  However 
wages  may  be  adjusted  by  bargains  freely  made  between  individual 
men,  the  rates  of  pay  that  result  from  such  transactions  tend,  it  is  here 
claimed,  to  equal  that  part  of  the  product  of  industry  which  is  trace- 
able to  labor  itself,  and  however  interest  may  be  adjusted  by  similarly 
free  bargaining,  it  naturally  tends  to  equal  the  fractional  product  that 
is  traceable  to  capital." — Ibid.,   Preface,  p.  i. 

It  is  unnecessary  to  stop  to  discuss,  or  even  to  appraise,  Clark's 
limitation  of  the  subject-matter  of  the  problem  to  concrete,  material 
goods  ;  e.  g. : 

"By  wealth  is  meant  those  sources  of  human  welfare  which  are 
material,  transferable,  and  limited  in  quantity"  (p.  i).  "Outward 
material  things  that  are  appropriable  and,  in  this  specific  way,  useful, 
are  economic  goods"  (p.  41).  "The  great  income  of  all  society — that 
which  is  to  be  distributed — really  consists  of  concrete  articles,  all 
of  some  use"  (p.  13),  It  is  unnecessary  also  to  discuss  his  consistent 
utilitarianism, — mostly  by  assumption  or  implication, — or  his  pro- 
nounced and  unquestioning  insistence  upon  "natural  law"  as  a  causal, 
directive,   and  compellative  agency  ;   e.  g. : 

"Is  there  a  natural  law  according  to  which  the  income  of  society 
is  divided  into  wages,  interest,  and  profits?  If  so,  what  is  this  law? 
That  is  the  problem  which  demands  solution"  (p.  i).  "There  is,  in 
short,  a  deep-acting  natural  law  at  work  amid  the  confusing  struggles 
of  the  labor  market"  (p.  2).  "Where  natural  laws  have  their  way, 
the  share  of  income  that  attaches  to  any  productive  function  is 
gauged  by  the  actual  product  of  it"  (p.  3).  "If  the  law  on  which 
property  is  supposed  to  rest,  the  rule,  'to  each  what  he  creates,' 
actually  works,  etc."  (p.  9).  "For  the  present,  be  it  noted  that 
exchanges  divide  and  subdivide  industry ;  they  range  its  forces  into 
groups  and  subgroups,  the  functions  of  which  are  determined  by 
natural  law"  (p.  20).  "Dynamic  changes  are  in  another  and  broader 
sense  natural.     Nature  herself  is  continually  disturbing  the   regime   of 

439 


440  VALUE  AND  DISTRIBUTION 

position  or  as  steps  in  the  argument  by  which  it  is  reached, 
the  following  propositions  become  of  especial  significance 

natural  prices  but  competition  is  trying  to  restore  it"  (p.  79),  etc. 
And  it  is  unnecessary  to  discuss  therewith  the  adoption  of  the  asso- 
ciated ethical  view  inclining  to  identify  natural  law  with  provi- 
dential adjustment  in  such  sort  that  optimism  recommends  itself  as  a 
scientific  faith  ;  it  is  fairly  to  be  said  that  while  all  these  are  issues, 
they  are  not  issues  by  which  the  general  positions  of  the  author's 
theory  of  distribution  must  stand  or  fall.  And  while  in  this  connection 
it  is  only  just  to  say  that  in  many  of  these  formulations,  such  as,  "A 
social  law  governs  the  apportiomnent  and  if  this  law  could  work 
without  friction,  etc.,"  Clark  means  in  the  main  by  "social"  and 
"natural,"  merely  static,  it  is  probably  equally  just  to  say  that  he 
often  has  in  mind  something  very  appreciably  different,  though  he 
himself  might  be  unable  to  say  precisely  what, — a  mysterious,  provi- 
dential, intrinsic  something,  more  or  less  personal  and  wise  and  benefi- 
cent, by  which  it  comes  about,  among  other  things,  that  all  these 
natural  results  are  fair  and  righteous  and  especially  calculated  to 
justify  the  ways  of  God  to  man,  at  the  same  time  with  furnishing  a 
deep  scientific  basis  for  an  optimism  which  would  otherwise  and  in 
another  sense  be  hopeless. 

But  it  is  nevertheless  to  be  said  that  this  optimism,  limitless  in 
quantity  and  confirmed  and  radical  in  quality  and  often  leading  the 
writer  to  justify  things  which  are  least  offensive  when  viewed  apart 
from  their  moral  quality,  has  yet  no  necessary  part  or  share  in  the 
argument  or  in  the  conclusions  of  the  book. 

And  further :  However  much  dissent  or  question  may  later  come  to 
be  expressed  as  to  the  fundamental  thesis  that  the  "income  that 
attaches  to  any  productive  function  is  gauged  by  the  actual  product 
of  it ;  .  .  .  .to  each  agent  a  distinguishable  share  in  production, 
and  to  each  a  corresponding  reward,  such  is  the  natural  law  of 
distribution,"  it  is  no  necessary  part  of  the  criticism  that  Clark  believes 
that  "more  hangs  upon  the  truth  of  it"  than  does  really  so  hang. 
With  the  thesis  once  established  he  must  still  be  indefinitely  distant 
from  justifying  the  present  organization  of  society.  It  is  clearly 
untrue  that  "the  right  of  society  to  exist  in  its  present  form,  and 
the  probability  that  it  will  continue  so  to  exist  are  at  stake."  One 
might  concur  in  Clark's  thesis  and  be  yet  the  most  radical  of 
socialists.  That  rent  is  paid  as  the  precise  correlative  of  the  pro- 
ductive efficiency  of  land  has  nothing  to  say  as  to  the  right  of  private 
oAvnership  in  land.  Carver  has  made  this  clear  in  his  review  of  the 
work  under  consideration  ;   nothing  remains  to  be  said : 

"The  right  of  the  present  social  order  to  exist  depends  upon  the 
laws  which  govern  not  functional  but  personal  distribution.  Our  only 
interest  in  functional  distribution  is  due  to  the  light  which  it  throws  on 
the  vastly  more  important  question  of  personal  distribution.  We  need 
to  be  shown  that  the  tendency  of  the  present  social  order  is  to  give 
to  each  individual  producer  the  share  which  he  individually  creates, 
and  no  more." — T.  N.  Carver,  "Dark's  Distribution  of  Wealth," 
Quarterly  Journal  of  Economics,  Vol.   XV,  p.   578   (August,    1891). 

But  here  again  Clark's  argument  and  conclusions  are  in  no  wise 
involved ;  the  substance  of  the  work  is  otherwhere. 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        44 1 

as  indicating,  for  present  purposes,  the  trend  of  the  theo- 
retical analysis : 

1.  Capital  is  regarded  not  as  concrete  capital  goods  but 
as  an  abstract,  homogeneous  value  fund. 

2.  For  static  purposes,  land  is  assimilated  to  capital 
goods  and  funded  with  them  into  abstract  capital,  socially- 
viewed. 

3.  Labor  is  also  funded  into  value-productivity  units. 

4.  Value  expresses  marginal  utility,  and  is  fixed  and 
determined  by  marginal  utility. 

5.  All  factor  rents  or  hires  are  equally  included  in  costs 
and  made  of  precisely  similar  relevancy  to  price;  but  these 
remunerations  are  rather  value-derived  than  value-fixing, — 
this  last,  however,  not  quite  definitely  beyond  misinterpre- 
tation. 

6.  The  possibility,  under  the  funding  principle  and  from 
the  group  point  of  view,  is  asserted  of  isolating  the  separate 
productivity  of  units  of  capital  and  of  units  of  labor. 

7.  Distributive  shares  are  determined  by  the  value-pro- 
ductive power  of  the  final  unit  of  the  funded  productive 
factor. 

8.  Society  is  viewed  as  an  organism,  and  derivative 
concepts  of  group  pain,  group  pleasure,  group  utility, 
group  cost,  etc.,  are  adopted  and  emphasized  as  necessary 
to  the  argument. 

9.  For  dyjianiic  purposes — purposes  of  retrospect  or  of 
prophecy — the  tripartite  division  of  productive  factors,  in 
the  sense  of  mechanical  and  technological  categories,  is 
made  important.^ 

^Propositions  (i),  (2),  and  (3)  should  i*i  this  connection  call 
for  no  further  discussion,  excepting  possibly  to  the  extent  that  in 
the  consideration  of  the  remaining  propositions  these  earlier  doctrines 
may  be  found  explicitly  or  impliedly  involved  ;  nor,  seemingly,  need 
any  proof  by  quotation  or  citation  be  adduced  that  the  positions  as 
above  formulated  are  actually  held. 

With  regard  to  proposition  (4)  also,  when  once  it  is  established  as 
actually  held,  neither  criticism  nor  discussion  would  appear  to  be 
necessary  for  present  purposes. 

In  the  interests  of  space  and  as  intimately  associated  with  (4), 
proposition  (8)   will  best  come  in  here  for  such  citation  and  quotation 


442  VALUE  AND  DISTRIBUTION 

Propositions  (5),  (6),  and  (7)  present  the  issues  with 
which  the  immediate  discussion  is  chiefly  concerned, 

as  niay  reasonably  be  called  for,  and  for  such  discussion  as  the 
particular  form  of  presentation  may  seem  to  demand : 

"In  every  stage  of  economic  evolution  wealth  consists  of  useful 
material  things ;  but  their  utility  is  of  the  kind  that  we  may  call 
specific.      Each   part  of   the    supply   has   some    importance    attaching   to 

it Outward    material    things    that    are    appropriable    and,    in 

this  specific  way,  useful,  are  economic  goods. 

"If  an  article  is  useful  to  one  man,  it  is  usually  so  to  another, 
and  is  therefore  in  itself  exchangeable"  (p,  41).  "If  men  do  in  fact 
use  a  number  of  units  of  consumers'  goods,  all  of  a  kind,  and  if  the 
specific  utility  of  these  goods  diminishes  as  they  get  more  and  more 
of  them,  then  what  they  will  give  for  any  one  of  them  will  be  gauged 
by  the  specific  utility  of  the  last  one.  If  these  familiar  premises  of 
the  modern  theory  of  value  correspond  with  the  facts  of  life,  the 
theory  explains  the  prices  of  goods  in  a  modern  market"  (p,  42). 

"The  primitive  [isolated]  economy  ....  cannot  test  final 
utilities  in  a  market,  for  it  has  no  exchanges.  Can  it  not,  then,  test 
them  at  all,  and  does  it  not  find  it  necessary  to  do  so  ?  We  may  easily 
see  that  it  does  this,  and  that  the  purpose  is  exactly  like  that  for 
which  organized  society  makes  the  same  test.  The  principle  of  final 
utility  belongs  in  the  first  division  of  a  theory  of  economics  and  has  to 
be  assumed  in  the  second  division"  (p.  43).  "The  law  of  final  utility 
fixes  the  point  at  which  such  a  producer  will  stop  creating  one  product 
and  begin  making  another.  A  modern  laborer,  with  money  in  his 
pocket,  is  supposed  to  consult  the  law  of  final  utility  in  making 
purchases   and   to    spend    each    dime   where,    in    view   of   the    supply    of 

different  things  on  hand,  it  will  do  him  the  most  good While 

markets  and  prices  are,  therefore,  modern  phenomena,  the  study  of 
which  has  no  place  in  a  division  of  the  science  devoted  to  universal 
truths,  the  law  of  final  utility  which  directs  the  purchases  that  are 
made  in  a  modern  market  also   directs   the  production  of  the  isolated 

man,    and    is    a    universal    law    of    economics In    modern    life 

these  laws  direct  the  social  demand  for  different  goods  offered  in  the 
shops  ;  but  in  primitive  life  they  control  the  manner  in  which  a  man 
husbands  his  productive  power  and  uses  it  where  it  will  do  him  the 
most  good.  The  law  of  final  utility  is  common  to  both  economies" 
(p.  44). 

"The  picture  of  an  isolated  man  turning  his  own  labor  from 
making  one  thing,  of  which  he  now  has  a  supply,  to  the  making  of  a 
thing  that  has  a  higher  final  utility,  illustrates  a  characteristic  of 
modern  life  which  is  in  danger  of  being  overlooked.  Through  the 
laws  of  value,  society,  in  its  entirety,  is  doing  exactly  this.  It  is 
turning  its  collective  energies  from  one  direction  to  another,  according 
to  the  law  of  final  utility.  Markets  and  values  afford  the  mechanism 
for  doing  this.  Think  of  society  as  an  isolated  being,  turning  its 
collective  energy  to  the  making  of  one  thing  till  it  has  enough  of  it, 

and  then  making  another,  and  you  have  the  fundamental   fact 

Through  the  mechanism  of  a  falling  price,  society  is  warned  to  turn 
its  energies  to  the  making  of  something  else  ;  and  its  whole  procedure 
is  nothing  more  nor  less  than  doing  what  an  isolated  man  would  do,  if 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        443 

It  would  not,  perhaps,  be  fair  to  ask  whether  Clark 
regards   costs    as    determining   value,    or   rather   value    as 

he  found  his  want  of  one  commodity  becoming  satiated.  If  then  we 
individualize  society,  if  we  make  it  to  be  in  its  entirety  one  isolated 
being,  and  if  we  give  rein  to  that  philosophy  which  treats  a  body  of 
independent  beings  as  one  organism,  we  find  it  doing  what  a  solitary 
man  would  do,  under  the  influence  of  the  law  of  diminishing  utility. 
Putting  a  price  on  each  article  in  a  market  is  the  act  of  the  collective 
organism    in   estimating   the    importance   to    itself   of   each    of   its   own 

products Each    man    pursues    his    own    interest;    but    as    the 

outcome  of  his  activity,  society  acts  as  a  solitary  man  would  act 
under  the  influence  of  the  law  of  diminishing  utility"   (pp.  45,  46). 

"Market  value,  then,  is  a  social  phenomenon ;  but  the  principle 
of  final   utility,   by   which   values   are   fixed,   is   universal    in    its    scope" 

(p.   47). 

"By  a  law  that  •  Austrian  studies  have  made  familiar,  the  value  of 
any  article  in  this  series  of  goods  of  one  kind  is  fixed  by  the  utility 
of  the  final  one — final  utility  universally  gauges  value"   (p.   163). 

"If  there  are  marginal  laborers,  in  the  sense  that  there  are  mar- 
ginal quantities  of  wheat,  cotton,  iron,  etc.,  then  these  final  or  mar- 
ginal men  are  likewise  in  a  strategic  position ;  for  their  product  sets 
the  standard  of  every  one's  wages"   (p.  90). 

"If  the  man  gives  to  an  employer  more  than  he  gets  from  him,  an 
inducement  is  offered  to  other  employers  to  take  him  at  a  better  rate 
of  pay.  Men  in  other  occupations  are  in  the  same  strategic  position, 
and  the  wages  of  social  labor  equal  the  product  of  a  composite  final 
unit  of  it. 

"How  is  this  product  to  be  measured?  Take  away  one  social 
unit  of  labor,  and  see  what  is  lost  by  the  withdrawal  of  it ;  or  add 
one  such  unit  and  see  what  is  gained  by  the  addition.  In  either  case  it 
is  possible  to  note  the  amount  of  product  that  is  separately  due  to  a 
unit  of  labor  and  to  no  other  agent.  Let  us,  then,  withdraw  what  we 
have  called  a  social  unit  of  labor.  This  is  a  composite  unit,  consisting 
of  some  labor  from  every  industrial  group  that  the  community  con- 
tains. We  will  take  away  cultivators  of  the  land,  smiths,  carpenters, 
weavers,  etc.,  in  carefully  adjusted  proportions,  causing  a  final  unit 
of  labor  to  vanish  from  every  specific  industry"   (p.   169). 

It  will  be  especially  in  place  to  note  here  that  Professor  Seligman's 
interpretation  of  the  relation  of  utility  to  price  offer  and  to  value  is 
substantially  identical  with  that  of  Professor  Clark, 

Under  the  "General  Law  of  Value"  it  is  said :  "Value  is  at 
bottom  the  expression  of  marginal  utility.  It  follows  that  all  prices 
must  therefore  be  studied  from  the  point  of  view  of  marginal  utility ; 
that  is,  of  the  power  of  marginal  increments  of  supply  to  satisfy  the 
marginal  increments  of  demand.  This  is  only  another  way  of  stating 
that  the  fundamental  explanation  of  value  is  marginal  efficiency  or 
the  capacity  of  marginal  units  to  satisfy  marginal  wants."  (Seligman, 
Principles   of  Economics,   p.    262.)      "The   contribution   or   efficiency    is 

the  positive  cause  ;  the  cost  of  production  adjusts  itself  to  this 

The  cost  adjusts  itself  to  the  service"  (p.  265). 

"Cost  of  production  is  thus  only  a  partial,  and  even  then  approxi- 


444  VALUE  AND  DISTRIBUTION 

determining  costs ;  his  analysis  goes  neither  far  nor  deeply 
into   the   value   problem.      To   be   strictly   relevant   to   his 

mate,    explanation   of   value ;  ^marginal    efficiency    is   the   universal    and 
ultimate  explanation"   (p.  265). 

"There  is  an  abundance  of  silver  below^  the  surface  that  is  not 
mined  because  it  will  not  pay  ;  if  the  marginal  efficiency  or  value  of 
silver  should  rise,  these  more  expensive  grades  would  at  once  be 
marketed,  and  the  new  marginal  cost  of  production  would  adjust  itself 
to  the  price.  The  price  wovild  not  rise  because  the  cost  increased  ; 
but  the  higher  price  would  be  fixed  at  the  higher  cost  because  that 
would  now  be  the  new  point  of  marginal  efficiency"  (p.  264). 

Professor  Seligman's  work  is,  however,  of  especial  interest  in 
this  connection  by  virtue  of  the  thorough,  consistent,  and  systematic 
manner  in  which  he  has  carried  this  society-as-an-organism  concept  to 
its  logical  limits — whether  of  truth  or  of  absurdity — as  an  interpreta- 
tion of  the  entire  body  of  economic  doctrine.  Such  further  criticism, 
then,  as  is  pertinent  to  this  particular  aspect  of  Professor  Clark's 
doctrinal  position  nray  well  be  merged  with  a  discussion  having  pri- 
marily to  do  with  Professor  Seligman's  more  detailed  exposition.  The 
following  is,  for  the  most  part,  either  reproduction  or  abridgment  of 
the  views  of  the  present  writer  as  elsewhere  expressed  in  this  con- 
nection. (See  "Seligman,  'Social  Value,' "  Journal  of  Political 
Economy,    March,    1Q06.) 

It  is  with  Seligman,  as  also  with  Clark,  most  difficult  to  deter- 
mine the  precise  significance  of  such  portions  of  the  discussion  as  are 
devoted  to  the  investigation  and  exposition  of  the  categories  of  indi- 
vidual utility,  individual  marginal  utility,  individual  demand,  entrepre- 
neur supply  computations,  entrepreneur  cost,  individual  sacrifice, 
individual  pleasure,  individual  pain  cost,  individual  profits, — surplus, 
competitive,  and  differential,  etc. ;  for  in  the  main,  all  this  individual- 
istic discussion  must,  seemingly,  be  regarded  as  really  and  funda- 
mentally beside  the  point,  or,  at  the  best,  as  only  introductory  to  the 
point, — not  precisely  side  issues,  truly,  and  presumably  not  irrelevancies, 
but  rather  analogical,  introductory,  or  superficial  matter  ;  for  the  heart 
of  the  doctrine,  the  realities  of  the  objective  business  situation  are 
sought  otherwhere. 

It  is  not,  of  course,  to  be  taken  as  Seligman's  intention  to  abandon 
any  of  his  many  formulations  of  the  strictly  individualistic  sort;  it 
still  stands  that  \"value  is  an  estimate  of  the  relative  importance  or 
utility  of  different  quantities  of  goods"  (p.  12)  ;  that  "when  we  speak 
of  the  value  of  a  commodity,  we  think  not  of  the  total  utility  of  the 
quantity  taken  by  itself,  but  of  the  marginal  utility  as  compared  with 
that  of  a  definite   quantity   of  other  commodities"    (p.    179). 

But  in  view  of  the  rich-man-poor-man  complication,  there  must 
obviously  be  difficulty  in  finding  someone  to  make  the  comparison ; 
a  pint  of  champagne  sells  for  the  same  price  as  a  sack  of  flour ;  are 
they  therefore  to  have  ascribed  to  them  equal  volumes  of  utility  rather 
than  merely  an  equality  of  command  over  purchasing  power?  Equal 
utility  to  whom  ?  Who  makes  the  comparison,  or  for  whom  is  it 
made?  It  is  evidently  not  enough  to  assert  that  "value  is  not  merely 
the     expression     of     utility     in     general,     but     of     marginal     utility" 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        445 

discussion,  the  question, — substantially  the  same  question, 
nevertheless, — should  be  formulated  to  ask  whether  distribu- 

(p.  198).  If  values  are  really  to  be  resolved  into  a  common  denomi- 
nator of  utility  something  further  is  waiting  to  be  done. 

The   solution   as   offered    runs : 

"It  is  society  as  a  whole  which  sets  a  value   [market  value]   upon 

things If  an  apple  is  worth  twice  as  much  as  a  nut,  it  is  only 

that  the  group  that  uses  apples  and  nuts  finds,  after  comparing 
individual  preferences,  that  the  desire  unsatisfied  by  the  lack  of  an 
apple  is  twice  as  keen  as  that  unsatisfied  by  the  lack  of  the  nut. 
Value,  therefore,  is  not  merely  the  expression  of  marginal  utility ; 
it  is  the  expression  of  social  marginal  utility"  (p.   180). 

"Since  value  is  a  social  conception  depending  on  a  comparison  of 
diverse  goods,  and  since  this  comparison  is  ordinarily  made  in  society 
by  their  transfer  from  man  to  man,  it  is  clear  that  the  value  with 
which  exchange  has  to  deal  is  exchange  value"  (p.   183). 

"Value  in  exchange  is  nothing  but  the  expression  of  its  true  value 
to  the  members  of  the  social  group,  that  is,  of  its  marginal  utility" 
(p.    183). 

"Exchange  power  is  based  on  the  comparative  estimates  of  direct 
social  utility  which  gives  to  every  owner  of  the  commodity  the  indirect 
utility   that  fixes  value   in   society"    (p.    183). 

This,  then,  is  the  first  step  in  the  solution — that  the  utility  which 
underlies  and  explains  value  is  not  individual  utility,  but  social  utility. 
And  we  have,  as  we  shall  later  see,  in  addition  to  this  social-utility 
concept,  concepts  of  social  pleasure,  social  pain,  social  demand,  social 
supply,  social  surplus,  diminishing  social  utility,  diminishing  social 
return,  a  social-labor  unit,  a  social-effort  unit,  social  sacrifice,  social 
cost ;  and  finally,  as  the  goal  and  summation  of  all  this,  social  value, 
that  is,  market  value.     This  will  evidently  bear  looking  into. 

Some  linguistic  uses  connected  with  collective  nouns  will  offer  a 
point  of  departure.  When  thought  of  merely  as  indicating  an  aggre- 
gate, a  unit,  the  collective  noun  takes  a  singular  verb  ;  if  regarded  as 
a  collection  of  units,  it  takes  the  plural  verb.  And  so  we  say,  "the 
committee  was  discharged,"  "the  committee  were  unable  to  agree" 
(with  one  another)  ;  "was  unable  to  agree"  (with  the  conference  com- 
mittee) ;  "the  army  were  marching"  or  "was  marching ;"  "  the  crew  was" 
or  "were  exhausted."  But  one  could  hardly  say,  "the  committee  was 
unable  to  agree"  (with  one  another)  ;  the  agreeing  has  to  be  done  by 
more  than  one  person. 

Now,  in  many  cases,  though  the  act  or  the  situation  asserted 
is  really  one  of  each  individual  by  himself,  there  is  no  occasion  for 
insisting  upon  this  ;  no  ambiguity  or  inaccuracy  or  misapprehension  is 
involved  in  saying  that  "the  battalion  is  eating  its  dinner ;"  it  is  a 
shorthand  fashion  of  speech,  but  is  perfectly  intelligible  ;  it  is  common 
enough  to  think  of  a  battalion  as  a  unit,  and  the  act  of  dining  is  a 
simple  one  in  which  all  join,  and  in  which  all  comport  themselves  in 
pretty  much  the  same  way ;  from  the  point  of  view  adopted,  the 
interest  proceeded  upon,  the  purpose  in  hand,  no  importance  attaches 
to  the  fundamental  separateness  of  the  activities,  and  to  their  entire 
lack  either  of   psychical   unity   or  of  purposive   co-operation ;   they   are 


446 


VALUE  AND  DISTRIBUTION 


tive  shares  are  to  be  explained  as  derivative  from  value  or 
as  causes  of  value;  is  value,  that  is,  the  intermediate  step 

simply  similar — roughly  simultaneous — and  are  thought  of  in  block. 
True,  one  man  eats  rapidly  and  another  slowly,  some  little  and  others 
much,  and  a  few  sick  ones  not  at  all ;  but  the  expression  serves,  and 
implies  its  own  limitations  of  accuracy. 

And  so  of  an  army,  when  we  say  that  "it  marches,"  no  doubt  is 
even  faintly  suggested  that  each  man  does  his  own  walking,  works  his 
own  muscles,  uses  up  his  own  tissue,  and  that  presumably  many  are 
halt,  while  others  limp,  and  some  swear.  But  no  one  of  these  differ- 
ences signifies  for  the  purposes  of  the  thought  in  mind  ;  each  man  is 
separately  getting  ahead,  moving  along,  like  all  the  rest ;  and  so  we 
say,  "the  army  is,"  etc. — serviceable  speech,  though  in  strictness 
inaccurate,  were  any  perversity  bent  on  misinterpreting  it.  But  when 
it  comes  to  asserting  that  the  army  is  brushing  its  teeth,  or  has  stubbed 
its  toe,  or  has  a  stomach  ache,  there  is  obvious  difficulty.  These 
things  are  not  done  jointly,  co-operatively,  by  aggregates,  and  will 
not  bear  thinking  over  into  this  form  ;  the  inaccuracy  of  the  collective 
idiom  is  obtrusively  manifest. 

And  so  we  may  speak  of  public  opinion,  the  preference,  or  habit, 
or  custom,  or  convention,  of  society  ;  and  no  harm  need  come  of  it, 
despite  the  fact  that  some  men  neither  think  nor  choose  in  the  manner 
implied,  but  have  their  own  peculiar  judgments  or  choices  or  wishes, 
and  yet  are  members  of  society  entitled  to  be  included  in  any  exact 
formulation  ;  everyone  knows  that  the  thought  really  runs  upon 
majorities  of  "  'most-everybodies  ;"  that  is,  no  harm  need  come  of  it, 
if  only  there  were  not  people  to  take  the  notion  of  a  "social  mind" 
seriously,  and  to  import  into  cases  calling  for  accurate  analysis,  and  to 
accept  as  sober  fact,  a  mere  figure  of  speech,  or  at  best  a  loose  analogy 
drawn  from  biological  science.  For  to  the  biologists  and  the  sociologists 
it  is  to  be  charged — or  credited — that  the  society-as-an-organism 
formula  has  found  its  way  into  economic  thought.  And  thus  hereby  a 
doctrine  long  since  abandoned  in  economic  reasonings  is  in  the  way  of 
reappearing;  for  have  we  not  need  of  normals  and  averages?  Else 
our  doctrine  in  getting  accurate  and  actual  will  get  difficult  also. 
And  so,  by  the  aid  of  the  sociologists,  through  the  magic  of  the 
society-as-an-organism  incantation,  a  resurrection  miracle  has  lately 
been   worked ;   we   salute  the  average   man. 

One  hesitates  to  approach  the  invidious  task  of  assigning  primacy 
in  this  new  school  of  thought ;  for  that  there  is  a  new  school,  and  that 
it  has  come  to  include  a  passably  generous  membership — somewhat 
localized  still- — and  that  its  doctrine  means  much  for  the  good  or  evil 
of  economic  science,  is  the  excuse,  so  far  as  there  can  be  any,  for  the 
present  protest.  But  it  is  nevertheless  to  be  said  that  Professor 
Seligman  is  the  first  writer  who  has  seriously  undertaken  to  carry  the 
doctrine  to  its  logical  conclusions  ;  and  thus  it  necessarily  comes  to  be 
true  that  whatever  is  further  said  here  is,  in  puri)ose  and  in  practical 
bearing,  impersonal,  theoretical,  and  general  in  its  reference,  rather 
than  primarily  an  examination  of  Professor  Seligman's  doctrine  as 
such. 

And  yet  one  asks  one's  self  why,  if  it  is  all  thus  easy — this  magic 
word   'social"  making  all  things  plain — if  the  heart  of  the  mystery  is 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        447 

toward  explaining  distribution,  or  are  the  distributive  shares 
to  be  taken  as  the  intermediate  step,  and  value  the  goal? 

thus  easily  plucked  out,  why  all  this  other  talk  of  gross  profits,  neces- 
sary and  minimum  cost,  individual  cost,  individual  utility,  marginal 
entrepreneurs,  normal  equilibria,  true  profits,  competitive  profits,  and  the 
like?  Why,  indeed,  any  talk  at  all?  Everything  will  explain  as  a 
social  resultant,  if  this  passes  as  explanation. 

In  this  doctrine  of  social  cost,  social  sacrifice,  and  social  value, 
one  must  look  to  find,  as  apparently  one  does  find,  a  renunciation  of  all 
allegiance  to  outlay  cost,  and  a  return  to  the  distinctly  pain-cost  and 
pleasure-balance   terms   of   analysis : 

'"Cost  of  production  is  the  measure  of  value ;  but  it  is  not,  as 
Ricardo  thought,  individual  cost.  Marginal  utility  determines  value  ; 
but  it  is  not,  as  Jevons  thought,  individual  utility.  Both  cost  and 
utility  measure  value,  because  ....  marginal  cost  is  always  equal 
to  marginal  social  utility"   (p.   198). 

"The  sacrifice  imposed  upon  society  to  secure  anything  is   ...    . 

the   exertion   needed   to    replace    it Thus,    when   we    speak   of 

social  cost,  we  really  mean  cost  of  production  ;  and  when  we  say  that 
value   is  influenced  by  cost,   we   mean   that  value  is  influenced  by  cost 

of  production We    think   no    longer   of   the    sacrifice    imposed 

upon  any  one  individual,  but  only  of  the  social  sacrifice,  or  cost, 
embodied  in  the  commodity  ;  or,  rather,  the  sacrifice,  or  cost,  to  the 
individual  is  the  result  and  reflex  of  the  sacrifice  to  the  community" 
(p.    197). 

"In  society  ....  whatever  the  rate  of  exchange,  it  is  only  the 
social  utility  and  the  social  cost  of  which  the  marginal  degrees  are 
equal.  If  a  knife  exchanges  for  a  book,  it  is  because  the  demand  in  the 
community  as  a  whole  is  such  that  the  marginal  sacrifice  to  society 
of  parting  with  a  book  is  equal  to  the  marginal  pleasure  of  society  in 
getting  a  knife.  [Whereto  goes  the  book,  and  whence  comes  the 
knife?]  To  put  it  more  accurately,  a  knife  will  exchange  for  a  book 
only  because  the  sacrifice  to  society  in  making  the  knife,  for  which  it 
receives  in  turn  the  pleasure  of  books,  tends  to  equal  the  sacrifice  of 
making    the    book,    for    which    it    receives    in    return    the    pleasure    of 

knives   (p.    197) To   any  individual  the   sacrifice   may  be   less 

than  the  pleasure,  but  there  will  always  be  a  marginal  individual  to 
whom  pleasure  and  sacrifices  are  equal.  The  marginal  pleasure  in  the 
aggregate  tends  to  equal  the  marginal  pain  in  the  aggregate.  The 
balance  or  equilibrium  is  between  the  pains  and  the  pleasures  of  the 
sum  of  individuals The  real  equilibrium  is  a  social  equilib- 
rium  The  real  cost  to  any  member  of  society  which  influ- 
ences value  is   not   the   subjective   cost   to   him"    (p.    197). 

Now,  what  does  it  really  mean  to  say  that  the  marginal  pleasure 
in  the  aggregate  equals  the  marginal  pain  in  the  aggregate  ?  What  is 
to  be  aggregated,  even  supposing  the  process  to  be  a  possible  one  ? 
There  is  always  a  marginal  person,  it  is  said — one  person  "to  whom 
pleasure  and  sacrifice  are  equal."  But  this  man  can  have  little  to  do 
with  the  case,  for  while  there  is  such  a  man,  "the  real  cost  to  any 
member  of  society  which  influences  value  is  not  the  subjective  cost 
to  him  ;"  and,  in  point  of  fact,  there  is,  after  all,  no  such  man,  for 
"it  is  only  the  social  utility  and  the  social  cost  of  which  the  marginal 


448  VALUE  AND  DISTRIBUTION 

Or,  again,  is  the  fundamental  problem  one  of  value  or  is  it 
one  of  distribution?  Or,  finally,  are  the  two  problems  not 
really  two  but  one? 

degrees  are  equal ;"  we  really  think  not  "of  the  sacrifices  imposed 
upon  any  one  individual,  but  only  of  the  social  sacrifice  or  cost, 
embodied  in  the  commodity ;  or  rather  the  sacrifice  or  cost  to  the 
individual  is  the  result  and  reflex  of  the  sacrifice  to  the  community." 

Nevertheless,  it  is  clear  to  Professor  Seligman — and  to  us — that 
things  have  utility  to  individuals  ;  and  somehow  it  must  be  true  that 
"the  estimate  put  by  the  individual  on  one  commodity  as  compared 
with  another  is  the  foundation  of  all  value"  (p.  179).  "Vakie  in 
exchange  is  nothing  but  the  expression  of  its  true  value  to  the  mem- 
bers of  the  social  group,   that  is,   of  its  marginal  utility"    (p.    183). 

It  is,  indeed,  true  that  by  the  possibility  of  exchange  a  commodity 
may  come  to  have  a  greater  indirect  utility  to  its  possessor  than  it  has 
direct  utility  to  him  ;  but  can  it  have  any  utility  to  society  greater  or 
less  than  it  has  to  him  ?  And  in  this  computation  is  he,  or  is  he  not, 
a  part  of  society?  "Its  indirect  utility  to  me  is  the  result  of  its  direct 
utility  to  society."  But  what  or  who  is  this  society  whose  direct 
utility  is  the  cause  of  the  indirect  utility  to  the  possessor?  And  how 
add  together  utilities  to  different  individuals,  "the  members  of  the 
social  group,"  so  that  a  "direct  marginal  utility  to  society"  may  have 
existence  ? 

It  must  be  understood  that  with  this  latest  school  of  value,  as 
with  its  predecessors,  the  principle  that  demand  and  supply  together 
fix  price  is,  for  whatever  it  is  worth,  freely  accepted ;  but  all  the 
while  with  this  difference,  that  demand,  as  conceived  by  this  latest 
school,  is  really  not  the  aggregate  of  the  separate  individual  demands, 
each  with  its  own  particular  psychology  and  its  peculiar  explanation  : 
"The  demand  that  tells  is  the  aggregate  demand  depending  on  the 
social   utility"    (p.   20). 

Likewise  cost  is  essentially  not  a  matter  of  individual  outlay  or 
sacrifice,  working  out  into  the  expansion  or  contraction  of  supply, 
accordingly  as  individual  preferences  and  profit  may  direct ;  cost  is 
rather   a   transcendental    thing: 

"Since  cost  is  a  form  of  disutility,  it  follows  that  the  real  cost 
of    importance    in    affecting    value    is    social    cost,    and    not    individual 

cost "Value      is      the      measure      of      sacrifice.         In      what 

sense?  ....  Evidently  not  of  individual  sacrifice.  A  street- 
sweeper  may  work  harder  than  a  factory  hand,  and  yet  the  value  of 
his  services  will  be  less.  Value  is  a  social  conception  ;  society  puts  its 
appraisal  upon  commodities.  If  value  is  a  measure  of  sacrifice,  and 
if   value    is    a    social    estimate,    value    must   be    the    measure    of    social 

sacrifice  or  cost The  sacrifice   of  each   is   compared   with  the 

needs  of  society  as  a  whole.  The  standard  is  social,  not  material. 
It  is  easier  to  be  a  street-sweeper  than  a  skilled  factory  hand.  Society 
is  more  willing  to  spare  the  former  than  the  latter,  for  to  replace  the 
one,  society  must  give  up  more  of  its  energy  than  to  replace  the  other" 
(P-   193). 

Note  here  that,  precisely  as  when  we  were  introductorily  discuss- 
ing individual  demand  and  individual  cost,  cost  was  made  a  derivative 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        449 

It  is  evident  that  Clark  regards  distribution  as  in  part  a 
process  under  which  an  aggregate  of  value  is,  as  product, 
apportioned  to  aggregates  or  groups  of  producers;  in  part 

of  demand,  so  here,  in  the  social  computation,  social  marginal  utility 
is  presented  as  adequate  and  controlling  for  value  ;  but  meanwhile  our 
real  problem  of  how  to  get  over  from  the  individual  reckoning  to  the 
social  explanation  obtains  admirable  and  adequate  recognition  and 
expression : 

"All  value  is  the  reflex  of  social  marginal  utility.  We  have  now 
to  study  the  nature  of  the  social  forces  which  operate  to  translate  into 
actual  prices  on  the  market  the  feelings  of  the  individuals  that  com- 
prise the  group"   (p.  223). 

If  this  problem  is  fairly  solved,  nothing  will  remain  to  be  asked  ; 
but  the  difficulty  and  the  regrettable  fact  of  it  all  is  that  the  transition 
over  from  the  individual  psychology  to  an  alleged  social  psychology 
is  nowhere  seriously  attempted,  unless,  indeed,  the  following  may  be 
taken  to  suffice  for  the  purpose : 

"Cost  means  socially  necessary  cost — not  pains  (or  their  money 
equivalent)  taken,  but  pains  saved.  It  is  only  because  individual  cost 
tends  to  adjust  itself  to  the  socially  necessary  cost  that  we  can  roughly 
speak  of  the  price  of  anything  depending  on  its  cost  of  production" 
(p.  244). 

"Socially  necessary  cost  ....  is  the  amount  which  the  pur- 
chasers as  a  group  are  willing  to  give  rather  than  make  the  article  for 
themselves.  If  the  individuals  cannot  reduce  their  cost,  they  will  stop 
producing.  If  they  reduce  their  cost  below  this  point,  the  point  itself 
will  move"  (p.  244).  And  so,  then,  it  appears  that  individual  cost  does 
affect  the  quantum  of  the  social  cost.  "Society  will  not  be  willing 
to  give  more,  because  what  the  producer  can  do,  the  rest  of  society  can, 
if  necessary,  do.  It  is  in  this  way  that  an  equivalence  is  brought 
about  between  individual  and  social  cost ;  and  it  is  only  because  of  this 
equivalence  that  cost  of  production  may  be  said  to  influence  value" 
(p.  244). 

But  in  view  of  the  fact  that,  by  assumption,  some  individual  pro- 
ducers will  not  be  able  "to  reduce  their  costs  and  will  stop  producing," 
while,  surely,  other  producers  will  so  be  able,  what  shall  be  made 
of  the  proposition  that  what  some  "producers  can  do,  the  rest  of  society 
can,  if  necessary,  do"  ?  Are  all  consumers  to  be  accepted  as  like  all 
the  producers,  despite  the  fact  that  the  producers  are  themselves 
unlike? 

Or  perhaps  the  following  should  be  cited  upon  the  point : 

"Cost  of  production  does  not  mean  individual  cost.  Value,  as  we 
know,  is  a  social  conception  ;  the  real  cost  of  production  which  affects 
value   is   the   socially   necessary   cost"    (p.    243). 

"The  law  of  exchange  may  be  equally  well  stated  as  the  law  of 
comparative  costs.  I  may  be  so  much  more  intelligent  than  my 
furnace  man  that  I  could  save  much  coal  by  tending  the  furnace  myself ; 
yet  I  prefer  to  look  after  my  business,  and  let  him  tend  the  furnace 
because  it  pays  each  of  us  to  do  so"  (p.  226). 

"The  important  point  is  not  that  a  commodity  costs  the  producer 
something,  but  that  it  saves  the  consumer  something.  It  may  save  one 
consumer  more  than  another,  but  its  value  depends  on  what  it  saves  the 


450  VALUE  AND  DISTRIBUTION 

as  a  process  under  which  the  original  group  holding  or 
imputation  of  value  is  subdivided  among  the  the  smaller 
and  subsidiary  process  groups  representative  of  the  prog- 
social  group  as  a  whole.  This  saving  of  social  cost  is  what  is  meant 
by  socially  necessary  cost The  cost  to  the  individual  pro- 
ducer will  adjust  itself  to  the  socially  necessary  cost,  that  is,  the 
amount  which  the  purchasers  as  a  group  are  willing  to  give  rather  than 
make  the  article   for  themselves"    Cp.   245). 

Evidently,  however,  this  reduces  individual  cost  to  social  demand  ; 
thereby  cost  comes,  not  to  fix  price,  but  to  be  fixed  by  price  ;  to  make 
the  determinant  of  value  the  question  of  what  a  commodity  saves  the 
social  group  is  to  abandon  the  cost  for  the  utility  side  of  the  analysis. 
And  thus,  finding  in  cost  no  explanation  of  price,  we  are  left  to  our 
further  devices  to  explain  that  social  price  which  lies  behind  individual 
cost. 

Or  the  explanation  for  shutting  out  from  consideration  all  indi- 
vidual peculiarities  may  be  that  they  are  assumed,  for  theoretical  pur- 
poses, not  to  exist.  Still,  if  this  were  the  view  adopted,  we  should, 
as  has  already  been  suggested,  be  precisely  back  to  the  reasoning  by 
averages  characteristic  of  an  earlier,  and  possibly  a  better,  time. 
But  space  fails  for  the  discussion  of  this  question  ;  and  we  recall  that 
our  author  has  himself  spoken  decisively  in  condemnation  of  the 
economic  man.  There  is  also  the  further  difficulty  that,  with  this 
"average-man"  analysis  once  adopted,  there  is  necessarily  an  end  to  all 
talk  of  margins,   social  or  other. 

The  truth  is,  however,  that  these  differences  between  individuals 
are  fully  recognized,  but  are  regarded  as  somehow  merged  and  lost 
in  the  social  utility,  the  social  cost,  the  social  demand,  etc. ;  and  yet 
the  reasoning  repudiates  the  economic  man,  declines  any  overt  and 
systematic  acceptance  of  the  method  of  averages,  and  adheres 
resolutely  and  consistently  to  the  marginal  analysis. 

Just  as  upon  p.  228  it  was  declared  that  "a  dollar  is  of  more 
worth  to  a  poor  man  than  to  a  rich  man — its  marginal  utility  is 
greater,"  and  that  "the  price  of  an  old  master  or  a  mediaeval  missal 
will  often  depend  on  the  wealth  of  the  purchaser ;"  but  as  it  was 
nevertheless  contended  that  "in  the  ordinary  transactions  of  life, 
where  we  deal  in  masses  of  commodities  ....  this  difference  in  the 
worth  of  money  may  be  neglected,"  so  now,  in  the  discussion  of  the 
theory  of  interest,  similar  differences  are  likewise  merged,  the  average 
method  refused,  and  a  cost-margin  analysis — of  the  pain-cost  type — 
presented : 

"The   only  way   in   which   capital    can   be   formed   is   at  bottom   by 

saving,    by    waiting,    by    forbearing    (p.    319) The    problem    is 

one  of  marginal  forbearance,  that  is,  of  sacrifice  at  the  margin  where 
he  must  choose  between  consumption  and  saving.  The  richer  a  man 
is,  the  more  remote  is  the  margin  where  he  will  have  to  decide.  The 
saving  of  a  dollar  means  something  very  different  to  a  rich  man  and  to 
a  day  laborer"   (p.  320). 

"When,  therefore,  we  say  that  interest  is  the  result  of  forbearance, 
we  really  mean  that  interest  is  the  result  of  marginal  forbearance, 
or  forbearance  at  the  margin This  marginal  point  will  indeed 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        45 1 

ress  of  the  commodity  through  its  various  stages  from  raw 
material  to  finished  product;  in  part,  also,  as  a  process  of 
partition  of  the  subgroup  holding  of  value  between  the 
individual  members  of  the  subgroup.  But  it  is  not  at  all 
so  clear  whether  this  threefold  view  of  the  total  distribution 
process  is  purely  logical  and  analytical — merely  one  way  of 
looking  at  the  case — or  is  rather  intended  as  realistic- 
ally descriptive  of  the  objective  facts,  and  as  tra- 
cing- the  actual  sequence  and  direction  of  the  causal 
forces.  But  it  is  none  the  less  important  that  an 
interpretation     should    be     arrived    at    upon    this     point. 

be  a  different  one  for  the  rich  and  the  poor  [but  not  different  ratio- 
wise],  for  the  spendthrift  and  the  miser,  but  this  difference  will  affect 
the  rate  of  interest  as  little  as  the  relative  wealth  of  the 
purchaser  affects  the  price  of  wheat  on  the  exchange.  The  value  of 
wheat  is  the  expression  of  its  marginal  utility  to  the  wheat-using 
group  ;  the  interest  on  capital  corresponds  to  the  difference  in  the 
marginal  estimates  of  present  and  future  uses  for  the  whole  capital- 
using  group.     Value  in  the  market  is   social  value"   (p.   398); 

And  all  of  this  coheres  logically  with  the  doctrine  of  an  earlier 
page: 

"Cost  of  production  is  the  measure  of  value  ;  b^it  it  is  not,  as 
Ricardo  thought,  individual  cost.  Marginal  utility  determines  value ; 
but  it  is  not,  as  Jevons  thought,  individual  utility.  Both  cost  and 
utility  measure  value,  because  ....  marginal  cost  is  always  equal  to 
marginal  utility"    (p.   198).       '-^' 

But  it  is  more  than  possible  that  more  than  justifiable  space  and 
time  have  already  been  .Iven  to  this  social  school  of  value.  It  remains, 
however,  to  query  why,  with  all  these  social  utilities,  demands,  sup- 
plies, costs,  sacriiices,  averages,  and  margins,  we  nowhere  find  any 
social  rent  or  interest  or  wages.  These,  indeed,  as  categories  of  dis- 
tribution, seem  to  be  admittedly  individualistic  ;  though  no  good  reason 
offers  why,  if  demand  is  social,  consumption  may  not  equally  be  so. 
But  if  wages,  rent,  and  interest  are  admitted  and  accepted  as  categories 
of  distribution — as  individualistic  shares  received  under  individual 
claims  for  value-producing  service  rendered — it  must  follow  that 
profit,  a  surplus  or  residual  of  some  sort  or  other,  is  also  an  individual 
category.  And  these  incomes  of  rent,  interest,  and  wages — distributive 
shares  to  the  recipients — are  obviously  costs  to  the  entrepreneur, 
and  as  such  lead  up  to  individual  supply,  and  through  supply  to 
market  value,  so  far,  at  least,  as  market  value  is  affected  by  supply 
influences.  What  will  the  social-value  school  do  with  this  situation? 
In  urging  that  not  individual,  but  only  social,  cost  is  relevant  to  market 
value,  the  school  will  be  under  obligations  to  work  out,  as  factors  of 
social  cost,  a  scheme  of  social  wages,  social  rents,  and  social  interest, 
and,  as  surplus  over  social  cost,  a  social  profit. 

In  fact,  however,  it  does  not  do  this.  For,  as  soon  as  we  turn 
from  the  value  problem  to  the  separate  treatment  of  the  distributive 
shares,  we  find  ourselves  to  have  descended  from  the  cloud-land 
mysteries  of  transcendental  econosiiics  to  the  old  and  beaten  paths  of 
the  traditional  analysis. 


452  VALUE  AND  DISTRIBUTION 

If  the  wages  and  rent  shares,  as  determined  inside 
the  subgroup,  are  fundamental  and  ultimate,  the  way 
is  clear  for  an  adequate  and  consistent  entrepreneur-cost 
analysis,  but  all  the  while  with  this  one  difficulty,  that  we 
must  forthwith  set  about  to  find  what  determined  these 
rent  and  wages  shares.  Or  if  we  can  start  with  the  market 
value  as  cause,  each  group  share  and  subgroup  imputation 
and  infra-group  partition  will  readily  resolve  its  difficulties, 
the  entrepreneur  of  course  being  taken  to  be  present;  but 
tlie  difficulty  will  still  remain  of  explaining  that  original 
value  with  which  the  explanation  has  improvidently  set 
forth.  And  if,  for  the  purpose,  utility  or  marginal  utility  or 
subjective  value  be  invoked,  there  is  still  no  help,  inasmuch 
as  each  of  these  assumes  as  fundamental  to  it  the  exist- 
ence of  a  supply. 

But  how  does  Clark  present  the  case  and  dispose  of  it? 
So  far  as,  from  discussions  mainly  introductory  in  charac- 
ter, a  reply  may  be  had  to  questions  of  this  sort,  it  must  be 
deduced  from  the  following: 

There  is  a  kind  of  distribution  that  does  not  fix  the  rate  of 
wages  and  interest,  but  determines  how  much  one  industry,  as  a 
whole,  including  its  laborers,  its  capitalists  and  its  entrepreneurs, 
shall  get,  as  compared  with  other  industries.  It  determines  whether 
one  whole  branch  of  business  shall  be  more  prosperous  than  another. 
This  is  an  intermediate  part  of  the  general  distributing  operation, 
and  it  is  accomplished  by  means  of  prices.  When  wheat,  for 
example,  is  high  in  price,  the  farming  industry  is  well  paid,  as  com- 
pared with  others ;  and  when  wheat  is  cheap,  that  industry  is  ill 
paid.  If  what  we  have  in  mind  is  the  so-called  "market  price"  of  an 
article, — the  immediate  price  of  any  given  supply  of  an  article, — this 
kind  of  value  governs  what  we  may  call  group  distribution.  If 
steel,  for  example,  sells  at  a  high  rate,  a  large  income  goes  to  the 
group  that  produces  it.  This  income  distributes  itself  somewhere 
in  the  group;  but  how  much  of  it  laborers  get,  and  how  much 
capitalists  and  employers  get,  is  a  question  that  we  do  not  now 
raise.  This  is  determined  by  an  ultimate  distribution  taking  place 
within  the  groups.  Group  distribution  is  a  preliminary  division  of 
this  social  income,  and  it  deals  with  branches  of  industry  in  their 
entirety.  The  terms  of  this  primary  division  of  the  social  income 
depend  on  the  prices  of  different  kinds  of  goods.  Farmers  want 
wheat  to  be  dear,  as  miners  want  ore  to  be  dear,  etc.  Prices,  then, 
fix  the  incomes  of  these  groups.* 

*  Clark,  op.  cit.,  p.   12. 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        453 

The  creation  of  such  a  general  stock  of  commodities  for  use  is 
a  great  synthesis,  which  goes  on  in  a  systematic  way.  One  group  of 
producers  makes  the  article  A,  another  group  makes  B,  another  C, 
etc.  As  A  is  sold,  the  sum  that  is  paid  for  it  is  apportioned  among 
the  entire  group  that  makes  it;  and  as  B  is  sold,  the  returns  from 
this  sale  are  divided  in  the  same  way,  among  all  who  have  helped 
to  make  this  article.  The  prices  of  completed  articles  thus  fix  the 
incomes  of  groups  in  their  entirety.    These  groups  are,  in  an  equally 

exact  way,  divided  into  subgroups If  wool  is  dear,  farmers 

thrive;  and  if  the  difference  between  the  price  of  wool  and  the 
price  of  cloth  is  large,  manufacturers  thrive.  It  is  market  values 
that  fix  the  incomes  of  subgroups  as  well  as  those  of  groups. 

Neither  of  these  price-adjusting  operations,  however,  directly 
fixes  wages  and  interest.  This  is  the  final  and  critical  part  of  dis- 
tribution. It  takes  place  within  the  subgroups,  and  it  constitutes  the 
third  and  final  division  that  has  to  be  made.  The  portions  that  fall 
to  farmers,  manufacturers,  etc.,  as  such,  have  to  be  further  sub- 
divided; for  a  share  must  be  paid  to  every  laborer  and  to  every 
capitalist 

This  distribution  goes  on  in  three  distinct  stages.  There  are  to 
be  made  a  division,  a  subdivision,  and  a  final  subdivision  of  the 
social  income.  The  first  division  fixes  the  income  of  industrial 
groups;  the  second  fixes  that  of  subgroups,  and  the  final  subdivision 
adjusts  wages  and  interests  within  each  of  the  innumerable  sub- 
groups in  the  system.  The  shares  of  the  groups  and  those  of  the 
subgroups  depend  entirely  on  the  prices  of  goods,  and  therefore  the 
fixing  of  market  values  results  in  the  adjustment  of  the  terms  of 

group    distribution Let    A"'    represent    some    one    completed 

product,  say  bread;  and  let  A  represent  raw  material,  the  standing 
wheat  of  which  it  is  made.      A'  may  then  represent  the  wheat  as 

threshed A"    may   represent    it    as    it    is    ground    into    flour. 

....  The  difference  between  the  price  of  A'  and  that  of  A"  deter- 
mines the  income  of  the  flouring  industry,  etc.  The  income  of  each 
subgroup  in  the  series,  then,  depends  directly  on  prices. 

A  philosophy  that  goes  behind  such  market  prices,  however, 
brings  us  to  what  are  called  "natural"  or  "normal"  prices.  These 
are  the  values,  expressed  in  terms  of  monej^  to  which,  in  the  long 
run,  market  values  tend  to  conform 

A  certain  force  that  operates  within  the  sphere  of  group  distri- 
bution establishes  the  normal  standards  to  which  market  values 
tend  to  conform Market  prices  fix  the  incomes  of  the  differ- 
ent groups,  as  such,  and  so  control  distribution  in  its  early  stages. 
....  A  deeper  force,  and  one  that  also  acts  in  distribution,  controls 
normal  prices.     Market  prices  are  the  cause  of  group  distribution; 


454  VALUE  AND  DISTRIBUTION 

normal  prices  are  the  effect  of  a  certain  phenomenon  of  distribu 

tion The  movements  that  make  prices  "natural"  are,  in  fact, 

efforts  on  the  part  of  different  men  to  get  their  natural  shares  of 
income.' 

In  view  of  the  fact  that  it  is  said  that  "the  social 
process  of  production  includes  exchange  and  distribution," 
and  that  "the  theory  of  value  and  that  of  group  [italics  the 
present  writer's]  distribution  are  one  and  the  same" 
(p.  24),  the  general  trend  of  the  doctrine  of  the  foregoing 
might  seem  to  be  that  the  value  field  and  the  distribution 
field  are  one  field,  and  that  the  two  problems  are  but  dif- 
ferent aspects  of  one  problem. 

But  on  the  whole,  the  position  seems  to  be  other  than 
this,  viz. : 

1.  That  market  value  controls   group  distribution; 

2.  That  the  market  value  distributed  to  the  group  con- 
trols the  values  assigned  to  the  subgroups ; 

3.  That  normal  values  control  market  values ; 

4.  That  (through  fixing  wage  and  interest  incomes,  and 
thereby  fixing  entrepreneur  costs?)  the  distribution  inside 
the  group  controls  normal  value. 

Rearranging  the  quoted  passages  in  such  fashion  as  to 
express  the  imputed  sequence,  and  recognizing  and  accept- 
ing the  attendant  dangers  of  misinterpretation,  the  doctrine 
would  run  as  follows: 

Market  prices  fix  the  incomes  of  the  separate  groups The 

fixing  of  market  values  results  in  the  terms  of  group  distribution. 
....  Market    prices    fix    the   incomes    of   the    different    groups    as 

such,  and  so  control  the  distribution  in  its  earlier  stages The 

income  of  each  subgroup  in  the  series,  then,  depends  directly  on 
prices. 

"Natural"  or  "normal"  prices  ....  ,are  the  values  ....  to 
which,  in  the  long  run,  market  values  tend  to  conform. 

A  certain  force  that  operates  within  the  sphere  of  group  dis- 
tribution establishes  the  normal   standards  to  which  market  values 

tend  to  conform A  deeper  force,  and  one  that  also  acts  in 

distribution,  controls  normal  prices.  Market  prices  are  the  cause  of 
group   distribution The  adjustment  of   natural   or  normal 

■*  Clark,   op.  cit,,  pp.    14-16. 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        455 

prices  is  a  part  of  the  distributive  process.  The  movements  that 
make  prices  "natural"  are,  in  fact,  efforts  on  the  part  of  different 
men  to  get  their  natural  shares  of  income. 

Being  again  interpreted,  this  appears  to  say  that  normal 
value  controls  market  value ;  that  market  value  controls 
group  and  subgroup  distribution ;  and  that  the  distribution 
inside  the  subgroup  controls  the  normal  value ;  that  is,  that 
the  ultimate  term  in  the  causal  sequence  is  this  infra-sub- 
group distribution  process;  everything  else  is  derivative 
herefrom. 

If,  however,  there  is  any  seeming  of  circuity  here,  it  is 
due  rather  to  the  sentence- juggling  device  than  to  the 
intrinsic  thought ;  the  difficulty  is  not  that  the  explanation 
offered  is  circuitous,  but  that  in  last  analysis  no  explana- 
tion is  offered ;  but  perhaps  none  should,  at  this  stage  of  the 
argument,  be  required. 

Notice,  at  any  rate,  that  it  is  not  said  that  the  actual 
market  value  of  any  time  is  determined  by  the  normal 
value,  but  only  that,  in  the  long  run,  market  value  is  con- 
trolled by  normal  value ;  it  may  remain  true,  then — and  it 
really  must  be  true — that  no  matter  what  the  trend  of  things 
or  the  necessary  long-time  adjustment  of  them  may  be, 
the  market  values  of  any  particular  time  are  due  to  the 
situation,  the  forces,  and  the  adjustments  of  that  partictilar 
time.  To  subscribe  to  some  long-time  control  over  the 
short-time  value  disturbs  in  no  sense  this  principle ;  the 
short-time  value  of  any  particular  sort  of  commodity 
remains,  for  its  time,  the  determinant  of  the  group  and 
subgroup  distribution  of  that  time.  For  purposes,  then, 
of  any  short-time  analysis,  it  would  be  necessary  that  some- 
thing be  offered  in  the  way  of  explanation  of  these  short- 
time  market  values. 

But  to  the  logical  validity  of  Clark's  position  nothing 
need  have  been  offered  in  this  regard ;  for  his  problem  has 
been  specifically  chosen  as  the  problem  of  static  distribu- 
tion ;  all,  then,  that  is  necessary  is  that  he  explain  static 
value.  The  position  on  this  point  is  as  follows :  Static 
values,  as  controlling  group  and  subgroup  distribution,  are 
the  result  of  the  interest  and  wage  apportionment  worked 
out  in  the  infra-group  distribution  process. 

But  it  nevertheless  appears  to  be  true  that  the  magni- 
tude of  the  group  distribuendum  out  of  which,  as  a  static 
problem,  the  specific  wage  and  interest  incomes  are  to  be 


456  VALUE  AND  DISTRIBUTION 

apportioned,  is  controlled  by  static  market  values.  The 
author's  problem  stands,  then,  if  circuity  is  to  be  avoided, 
as  an  alternative  problem — either  (i)  to  explain  the  static 
value  independently  of  the  static  distributive  shares,  or 
(2)  to  explain  the  distributive  shares  independently  of  the 
static  values. 

But  it  is  forthwith  to  be  added  that  something  purport- 
ing to  be  an  explanation  of  the  distributive  shares  in  this 
tertiary,  infra-subgroup  distribution  is  offered,  which,  in 
terms  at  least,  makes  no  appeal  to  the  support  or  aid  of 
market  values. 

The  influence  that  brings  production  to  this  natural  state  is  the 
effort  of  laborers  and  capitalists  to  seize  any  special  gain  that  may 
be  offered  to  them,  by  moving  to  any  group  in  which  the  price  of 
the  product  is  high.  This  is  clearly  an  operation  in  group  distribu- 
tion. Thus  an  influence  that  originates  in  distribution  brings  about 
a  state  of  social  production  in  which  exchange  values  are  normal 
(p.  18).  Prices  are  at  their  natural  level  when  labor  and  capital  in 
one  industry  produce  as  much  and  get  as  much  as  they  do  in  any 
other.  Normal  prices  mean  equalized  wages  and  equalized  interest. 
If  the  prices  of  wheat,  wool,  iron,  lumber,  etc.,  were  such  that  no 
laborer  and  no  capitalist  could  acquire  an  enlarged  producing 
power  by  leaving  the  industry  that  creates  one  of  these  commodities, 
and  betaking  himself  to  one  that  creates  another,  the  price  of  each 
of  the  commodities  would  be  normal  (p.  16).  The  proximate  cause 
....  is  a  state  of  production;  that  ultimate  influence  that  controls 

it   is   an  action   of   the   forces   of   distribution Market  value 

falls  within  the  science  of  distribution.  On  the  surface,  it  is  current 
market  prices  that  control  the  distribution  which  takes  place  among 
different  groups  or  specific  industries.  These  prices,  however,  are 
transient,  and  they  fluctuate  about  certain  more  permanent  stand- 
ards. The  tendency  of  group  distribution  to  become  normal,  that 
is,  to  bring  wages  and  interest  to  an  approximate  equality  in  differ- 
ent   industries,    draws    prices    toward    the    normal    standard 

What  then,  is  left  to  be  treated  under  the  title,  exchange?  Only 
the  actual  passing  of  goods  from  hand  to  hand  (p.  19). 

That  the  ultimate  determinants  of  value  and  of  distribu- 
tion must  be  of  the  general  sort  indicated  is  beyond  ques- 
tion ;  all  the  facts  must  contain  within  themselves  all  the 
explanations,  causally  speaking,  though  perhaps  not  descrip- 
tively or  intcrprctatively  speaking.  But,  for  this  causal 
explanation  to  stand  as  complete,  more  must  be  offered 
than  the  mere  disposition  of  men  to  seek  the  direction  of 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        457 

maximum  pleasure  or  of  minimum  pain,  or  even  the  direc- 
tion of  maximum  advantage  or  of  minimum  sacrifice ;  ac- 
count must  also  be  rendered  of  the  needs  and  desires  of  men 
for  consumption  goods,  on  the  one  side, — on  the  other  side, 
of  human  productive  capacities  and  differentiations,  and  of 
the  objective  productive  equipment — inclusive  of  opportuni- 
ties, franchises,  good-will,  trade  secrets,  and  purchasing 
power — in  all  its  differentiations  and  adaptations  and 
specializations  and  distributions. 

But  if,  for  any  normal  equilibrium  value  or  for  any 
temporary  equilibrium  value,  an  explanation  of  the  sort 
offered  is  the  kind  of  explanation  for  which  we  are  in 
quest,  and  if  it  is  of  a  character  to  suffice  for  the  problem 
of  distribution  within  the  subgroup,  and  thereby  to  furnish 
the  basis  for  the  explanation  of  costs  and  market  values, 
and  thus  to  establish  distribution  as  fundamental  to  value, 
why  pursue  this  subject  farther  or  any  subject  farther? 
Why  need  anything  more  be  said  for  either  the  value  prob- 
lem or  the  distribution  problem?  All  the  causes  are  surely 
adequate  to  explain  all  the  results.  The  difficulty,  however, 
is  that  on  this  level  of  explanation  both  value  and  distribu- 
tive shares  are  equally  results,  and  results  of  the  same 
order,  and  neither  is — or  can  be — shown  to  be  the  inter- 
mediate cause  of  the  other.  And  regarded  from  this  point 
of  view,  the  explanation  of  distributive  shares,  whether 
looked  at  as  a  problem  of  process  or  of  causes,  is  neither  a 
group  nor  a  subgroup  investigation ;  the  individual  choice 
of  personal  activity  and  of  investment  application  is  a 
choice  wide  as  the  whole  field  of  capacity  and  opportunity. 

But  further :  Accepting  it,  for  the  time  being,  as  true 
that  the  ultimate  adjustment,  w^hen  reached,  is  an  adjust- 
ment presenting  equalized  wages  and  equalized  interest 
(property  rentals?),  as  the  result  of  the  free  play  of  choice 
between  competing  opportunities,  and  not  at  all  stopping 
to  wonder  why  and  in  what  sense  all  wages  can  possibly 
become  equal,  it  is  still  to  be  objected  that  these  competing 
opportunities  are  themselves  mainly  the  expression  of  an 
existing  value  situation ;  each  individual's  choice  is  made 
within  this  value  situation  and  as  directed  by  it.  True  it  is 
that  the  entire  situation  of  needs,  capacities  and  posses- 
sions, adjustments,  and  distributions,  may  be  taken  as 
fundamentally  directive  and  causal,  but  not  so  the  indi- 
vidual choices  made  within  the  conditioning  and  directing 


458  VALUE  AND  DISTRIBUTION 

situation,  nor,  for  that  matter,  all  the  choices,  excepting 
with  the  tacit  assumption  of  all  the  situation  and  in  connec- 
tion with  it.  The  individual  choice,  or  even  the  aggregate 
of  choices,  is  far  more  result  than  cause,  with  the  indi- 
vidual activity  infinitesimal  reacting  as  cause  upon  the 
entire  situation. 

And  if  any  attempt  is  made,  in  the  line  of  explanation, 
to  go  farther  than  an  appeal  to  this  huge  and  vague  situa- 
tion aggregate,  and  if  definite  and  detailed  explanation  for 
anything  be  offered  in  terms  of  intermediate  causes  and 
sequences,  there  will  forthwith  come  the  abandonment  of 
any  further  talk  of  value  as  the  cause  of  any  distributive 
shares,  group  or  other,  or  of  distributive  shares  as  the 
causes  of  value;  the  investigation  will  be  compelled  to  refer 
itself  to  actual  business  processes,  to  the  machinery  and 
methods  and  adjustments  of  a  competitive  society  under 
entrepreneur  organization  and  direction.  Any  investigation 
that  approaches  distribution,  leaving  value  aside  or  treat- 
ing it  as  a  problem  to  be  solved  by  some  casual  and  taken- 
for-granted  appeal  to  distributive  shares  as  the  basis  of 
entrepreneur  costs,  is  for  practical  purposes  no  solution 
at  all. 

But  another  solution  may  possibly  be  open,  for  what- 
ever it  is  worth,  a  solution  so  readily  deducible  from  the 
organic  concept  of  society  that  it  may  well  have  seemed  to 
dispense  with  an}^  special  labor  of  exposition : 

Conceiving  of  Crusoe  as  a  desiring  fact  as  over  against 
Crusoe  as  a  producer  pain-burdened  in  his  processes  of 
production,  and  setting  him  upon  some  assumed  island  of 
definite  possibilities  and  limitations,  we  have  seen  it  to  be 
possible  to  deduce  a  fairly  workable  value  doctrine  for  the 
isolated  economy.  If,  then,  society  may  be  taken  as  having 
social  needs  and  desires,  and  thereby  a  derivative  social 
marginal  utility  and  a  social  subjective  worth  and  a  social 
subjective  value, — and  if,  over  and  against  this  demand  term, 
there  are  social  pains  and  abstinences  and  sacrifices  ade- 
quate to  function  as  cost  terms  in  the  value  equation,  no 
further  assumptions  appear  to  be  called  for;  a  complete 
account  has  been  rendered  of  market  value,  for,  fortunately, 
the  environment  does  not  also  have  to  be  obtained  by  this 
process  of  assumption. 

And    thus,    with    the    market   values    all    satisfactorily 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        459 

explained,  nothing  remains  to  be  done  but  to  deduce  the 
distributive  shares. 

Precisely  so — but  how  deduce  these?  What  problem 
of  distribution  is  open?  Distribution  among  whom?  And 
under  what  basis  of  claim?  Society  did  the  producing  and, 
by  assumption,  bore  the  pains  thereof.  Who,  then,  is  this, 
or  who  are  these  now  coming  to  demand  that  payment  be 
had  by  some  test  of  distinguishable,  separable,  and  assign- 
able contributions,  productions,  and  deservings?  If  value 
fixation  is  a  social  fact, — costs,  pains,  sacrifices,  pleasures, 
marginal  utilities,  and  effective  utilities,  all  social  facts 
attaching  to  the  appetitive  or  emotional  psychology  of  the 
social  organism, — how  comes  it  that  "there  are  three  generic 
shares  that  are  unlike  in  kind,"  and  that 

the  entire  study  of  distribution  is  ....  a  study  of  specific  pro- 
duction; is  an  analysis  of  the  wealth-producing  operation,  and  a 
tracing  back  to  each  of  the  three  agencies  that  together  bring  wealth 
into  existence  of  the  part  which  it  separately  contributes  to  the  joint 
result.  To  each  agent  a  distinguishable  share  in  production,  and  to 
each  a  corresponding  reward — such  is  the  natural  law  of  distri- 
bution.' 

That  by  Clark  land  and  all  other  instrumental  goods 
are  reduced  to  one  homogeneous  fund  of  value  units  will 
at  this  point  require  neither  illustration  nor  proof.  Labor 
is  similarly  funded  into  a  volume  of  homogeneous  labor 
units.  And,  either  as  included  within  this  labor  fund  or  as 
basis  of  a  distinct  and  separate  fund,  entrepreneur  activity 
also  must  seemingly  be  subjected  to  the  funding  process 
and  be  reduced  to  a  homogeneity  of  value  units.  Only  so, 
in  fact,  is  it  possible  to  establish  the  central  thesis  of  Clark's 
argument,  the  tendency,  under  normal  conditions,  of  the 
remuneration  of  each  and  every  unit  in  the  fund  to  express, 
in  precise  equivalence,  the  productive  contribution  of  that 
unit: 

There  is  before  us  the  picture  of  social  labor  co-operating  with 
social  capital.  Both  are  governed  by  the  law  of  diminishing  returns, 
and  their  earnings  are  fixed  by  the  productivity  of  their  final  units. 

°  Oark,  op.  cit.,  pp.  3,  4. 


46o  VALUE  AND  DISTRIBUTION 

....  Wages  conform  to  the  final  unit  of  social  labor  and  interest 
to  the  product  of  the  final  increment  of  social  capital.' 

Btit  "how  may  we  measure  labor,  capital,  and  their 
products"  so  as  to  make  certain  whether  this  proportionality 
of  remunerations  to  funded  units  everywhere  holds?  "We 
need,  evidently,  a  universally   usable   measure  of  value." 

"Provisionally,  the  'doses'  of  capital  are  measured  in 
terms  of  money ;  but  it  is  necessary  to  know  exactly  what 
the  money  ultimately  represents."  ^  Is  this  ultimate  under- 
lying verity — this  definitive  fundamental  fact  in  value — 
an  objective  labor  homogeneity?  Or  is  it  a  personal-sacri- 
fice homogeneity?  "If  it  means  either  of  these  two  things, 
it  is  still  necessary  to  find  some  way  in  which  to  express 
a  measurement  of  labor  or  of  sacrifice."  And  to  Clark  "it 
is  clear  that  the  [value]  product  of  the  capital  cannot,  in 
such  connections  as  these,  be  the  basis  of  the  measurement 
of  the  capital,"  for  this  would  be  circular  in  reasoning: 
"If  we  say  that  whatever  produces  a  unit  of  consumers' 
wealth  is  a  unit  of  capital,  we  assert  nothing  by  adding 
that,  at  any  one  time,  all  units  of  capital  are  equally  pro- 
ductive." So  it  is  only  provisionally  that  the  doses  of 
capital  are  meastired  in  terms  of  money;  we  must,  it  is 
said,  go  deeper  than  this : 

A  universal  unit  for  measuring  economic  value  is  necessary,  if 
the  law  of  final  productivity  is  to  have  scientific  exactness.  The 
entire  study  of  wealth  is,  indeed,  meaningless,  unless  there  be  a  unit 

for  measuring  it Ratios  of  exchange  alone  afford  no  answer 

to  the  economist's  chief  inquiries.  The  actual  wealth  of  a  com- 
munity consists  in  heterogeneous  things.  If  they  are  ever  added 
together,  it  must  be  because  there  is  some  one  element  found  in  all 

of  them  and  this  element  is  absolutly  measured There  is  one 

element  that  is  common  to  all  the  diverse  things  that  appear  in  the 
inventory  of  social  wealth.     In  every  commodity  there  is  a  power  of 

a  certain  kind  which  can  be  measured There  resides  in  each 

of  them  a  certain  amount  of  influence  on  human  well-being 

Effective  utility  is  the  name  by  which  this  potency  of  goods  will  here 
be  designated Effective  utility  is  the  basis  of  values." 

Effective  utility  is,  then,  the  common  denominator  into 
which  all  values  are  to  be  resolved  and  by  virtue  of  which 

^  Qark,  (?/>.  cit.,  p.  373. 

^  Ibid.,  p.  374-  ^  Ibid.,  pp.  375,  376. 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        461 

each  and  all  come  to  be  rational,  intelligible,  and  compa- 
rable. And  this  is  in  line  with  the  doctrine,  already  noted, 
that  "the  principle  of  final  utility  by  which  values  are  fixed, 
is  universal  in  its  scope."  ^^ 

"Final  utility  universally  gauges  values."  ^^ 
That  is  to  say,  effective  utility  and  final  utility  are 
essentially  the  same.  True,  "amounts  of  wealth  are  usually 
stated  in  money ;"  but  the  coins  are  not  really  the  measure ; 
they  merely  express  power  over  the  things  that  afford 
service :  "They  will  buy  goods  or  set  men  to  working. 
There  resides  in  each  one  of  them  a  certain  amount  of 
influence  on  human  well-being;"  they  control  effective 
utility.  "Effective  utility  is  the  name  by  which  this  potency 
of  goods  will  here  be  designated."  ^^ 

But  admittedly  some  things  have  utility  not  because 
they  give  us  pleasure  but  because  they  shield  us  from  pain  ; 
and  Clark  insists  that  this  pain-avoiding  quality  is  the  char- 
acteristic and  essential  and  ultimate  fact  in  all  effective 
utility ;  the  marginal-utility  analysis  does  not  go  deeply 
enough,  or,  rather,  it  does  not  bring  out  quite  adequately 
the  important  aspect,  the  sacrifice  aspect,  of  things  of 
service : 

Give  to  a  man  a  barrel  of  flour  and  you  make  him  by  so  much 

better  off If  you  had  not  given  him  the  flour,  he  would  have 

got  it  by  some  sacrifice;  and  what  you  have  done  is,  in  effect,  to 
save  him  from  sacrifice.  This  effect  measures  the  value  of  the 
flour."  Take  away  a  barrel  of  flour  that  the  man  now  has,  estimate 
the  real  detriment  that  he  suffers,  and  you  measure  the  effective 
utility  in  another  way." 

Is  this  subjective  worth?  It  looks  like  it;  but  if  it  is 
assumed  that  the  loss  must  be  made  up  by  labor  rather 
than  submitted  to  directly  or,  perhaps,  shifted  to  something 
else,  the  doctrine  diverges  from  the  Austrian  analysis,  and 
— still  more — diverges  from  the  truth.  And  if  it  be  admit- 
ted that  the  loss  has  not,  of  necessity,  to  be  made  good,  or 
that,  if  made  good,  it  may  be  at  the  cost  of  some  substituted 

^"Ibid.,  p.  47.  "^Ibid.,  p.  376.  ^*Ibid.,  p.  377. 

^Ibid.,  p.  163.  ^Ibid.,  p.  376. 


462  VALUE  AND  DISTRIBUTION 

service,  we  have  nothing  but  subjective  worth,  the  cost 
aspect  of  utility,  "the  importance  attached  to  a  good  as  the 
indispensable  condition,  etc.,"  a  purely  personal  category 
and  an  unrelated  feeling  magnitude.     Clark  continues: 

He  must  [?]  have  food,  and  will  get  it  by  sacrifice  of  some 
kind.  He  may  not  fully  replace  the  sacrifice  of  the  flour;  for  he 
may  live  on  maize,  and  in  that  case  the  utiHty  of  the  barrel  of  flour 
is  gauged  by  the  cost  of  the  maize  and  the  unsatisfied  want  of  a 
better  quality  [or  quantity?]  of  food. 

But  later  upon  the  same  page  the  labor-necessity  view 
is  fully  adopted: 

The  final  measure  in  the  case  is  one  of  pain ;  for  the  ultimate 
injury  that  is  done  to  a  man  by  depriving  him  of  any  one  means  of 
pleasure,  resolves  itself  into  putting  him  under  the  necessity  of 
enduring  a  certain  amount  of  personal  sacrifice  in  the  effort  to 
secure  something  that  will  effectually  replace  it.^'' 

But  in  any  case,  we  have  arived  at  nothing  more  or 
other  than  the  old  difficulty  with  regard  to  either  marginal 
utility  or  subjective  worth;  as  a  purely  personal  experience, 
unrelatable  to  the  experience  of  any  other  person,  and,  as 
absolute  feeling  magnitude  only  most  vaguely — as  mar- 
ginal item  of  a  series — related  to  any  other  experience  of 
the  same  individual,  it  perhaps  does  not  greatly  matter 
whether  the  sacrifice  be  asserted  to  refer  to  the  loss  of 
utility  merely  or  to  the  labor  pain  of  replacement.  If  mar- 
ket value  is  to  be  resolved  into  a  homogeneous  fund  of 
utility  units,  there  are  clearly  some  further  steps  to  be 
taken,  and  these  of  a  passably  difficult  sort.  That  these 
steps  are,  indeed,  impossible  of  accomplishment,  earlier  chap- 
ters have  sufficiently  emphasized.  It  remains,  then,  to  pre- 
sent, with  the  minimum  of  comment,  Clark's  proposed 
method : 

It  is  this  process  ....  of  determining  how  important  it  is  to 
have  one  thing  by  ascertaining  how  much  it  will  cost  to  get  a  very 
different  thing,  that  reveals  one  special  significance  of  a  study  of 
effective  utility.  Men  pursue  happiness  in  the  generic,  and  the  form 
in  which  it  may  come  is  secondary.  The  measurement  of  well- 
being,  thus  regarded  in  the  abstract,  is  an  occult  but  dominant  fact 
in  exchanges.  A  man  may  have  a  monopoly  of  one  means  of  pro- 
moting happiness,  yet  he  cannot  set  his  own  price  for  his  wares. 
That  is  fixed  by  the  cost  entailed  on  the  community  by  the  effort 

"  Clark,  op.  cit.,  p.  2>77- 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        463 

to  secure,  by  any  means  whatever,  an  equal  quantity  of  happiness. 
Effective  utility  ....  is  measured  by  society  as  a  whole;  and  in 
this  lies  the  significance  of  the  phrase,  "measure  of  effective  social 
utility."  ....  The  price  of  a  thing  gauges  its  importance,  not  to 
one  man,  but  to  all  men,  as  organically  related  to  each  other.  The 
efficient  serving  power  of  an  article  varies  in  the  case  of  different 

individual  users,  but  to  society  as  a  whole  it  is  constant Into 

the  mysteries  of  distinctly  social  pyschology,  therefore,  the  measur- 
ing process  that  gauges  value  must  be  traced.  Essentially  simple 
in  nature  is  the  operation,  simpler  even  than  the  act  of  the  man 
who  decides  how  important  a  horse  is  to  himself  by  seeing  how 
long  he  must  work  to  get  a  boat  and  a  tennis  outfit 

It  is  now  necessary  to  give  definiteness  of  meaning  to  the  word 
social.  There  is  such  a  thing  as  a  unit  of  social  improvement  or 
detriment.  It  happens,  however,  that  the  detriment  is  more  avail- 
able for  measuring  purposes  than  is  the  improvement ;  and  so  the 
final  unit  of  value  is  the  sacrifice  entailed  by  a  quantity  of  dis- 
tinctly social  labor.  Society,  in  short,  sets  value  upon  a  thing  by 
ascertaining  how  much  work  is  necessary  to  replace  it  or  to  get  an 
equivalent  for  it." 

It  would  seem,  then,  that  in  order  to  measure  a  unit  of 
social  utility,  we  must  first  make  precise  the  notion  of  a 
unit  of  "distinctly  social  labor ;"  what,  then,  is  this  ? 

Doubtless  utility  exists  for  each  man  and  sacrifice  exists 
for  each  man;  but  because  each  man  can  make  these 
estimates  for  himself,  does  it  safely  follow  that  society  can 
do  the  same  for  itself?  And  if  we  know  how  the  individual 
man  does  it,  shall  we  also  know  how  society  does  it?  So  it 
seems : 

It  may  be  assumed  that  whole  articles  are  made  by  individual 
workers.  As  such  goods  leave  the  makers'  hands  day  after  day,  in 
a  continuous  supply,  they  seek  purchasers.     No  one  man  will  take 

many,  but  society  will  take  them  all That  each  class  of  goods 

is  made  in  great  niDuhers  by  one  man  and  consumed  singly  by  many 
men,  is  the  essential  thing  to  be  noted. 

It  is  the  users  of  an  article  that  can  best  gauge  the  well-being 
that  it  gives  them,  and  they  make  the  estimate  continually.  Shall  I 
buy  this  article?  ....  Is  this  article  or  some  other  of  equal  cost 
the  more  desirable?  ....  If  each  man  could  measure  the  useful- 
ness of  an  article  by  the  effort  that  it  costs  him  to  get  it,  and  if  he 
could  attain  a  fixed  unit  of  effort,  he  could  state  the  utility  of  a 

"/Wd.,  p.  378. 


464  VALUE  AND  DISTRIBUTION 

number  of  articles  in  a  sum  total.  Similarly,  if  all  society  acts  in 
reality  as  one  man,  it  makes  such  measurements  of  all  commodities, 
and  the  trouble  arising  from  the  fact  that  there  are  many  measurers 
disappears.  A  market  secures  this  result,  for  society  acts  as  an 
individual  unit — like  an  individual  buyer." 

And  similarly  for  the  sacrifice, — which,  we  recall,  has 
thus  far  been  presented  as  a  better  measure  of  the  effective 
utility  than  is  the  marginal  utility  itself,  although  this  is 
not  to  be  taken  as  in  any  sense  an  abandonment  of  the 
notion  that  all  value  resolves  into  and  is  nothing  but  effect- 
ive utility;  sacrifice  is  somehow  a  better  measure  of  utility 
than  is  utility  itself;  indeed,  how  can  utility  serve  as  its 
own  measure?  And  it  needs  measure,  while,  it  seems, 
sacrifice  does  not,  or  perhaps  is  more  easily  measured : 

Work  ....  consists  of  concrete  acts  of  men ;  and  these  are  as 
unlike  in  themselves  as  are  the  miscellaneous  articles  that  are  to  be 
measured  by  them.  Can  vfe  make  one  sum  of  the  labor  involved  in 
cutting  wood,  in  playing  violins,  in  setting  type,  etc.  ?  Adding  the 
unlike  acts  that  constitute  social  labor  is,  it  appears,  as  difficult  as 
adding  the  products  that  constitute  social  wealth.  There  is  need  of 
a  pervasive  element  in  the  actions,  and  one  that  can  be  measured. 
Such  an  element  can  be  found;  for,  as  utility  is  common  to  all  com- 
modities, so  personal  sacrifice  is  common  to  all  varieties  of  labor. 
There  is  service  rendered  to  man,  on  the  one  hand,  and  there  is  bur- 
'den  imposed  upon  him,  on  the  other.  Social  self-service — the  act  of 
mankind  ministering  to  its  own  needs — constitutes  the  whole  eco- 
nomic process A  point  is  to  be  found  at  which  social  costs 

of  production  offset  and  measure  social  gains We  can  .... 

estimate  pleasure  in  terms  of  pain." 

An  isolated  worker  is  the  user  of  his  own  products,  and  he 
naturally  works  each  day  till  it  does  not  pay  to  work  longer. 
Additional  product  might  be  gained  by  prolonging  the  toil,  but  the 
advantage  of  having  it  could  not  compensate  for  the  sacrifices  of 

making   it The   man   that   we   are   studying   is   a   society   by 

himself;  he  makes  things  and  he  alone  uses  them Of  a  society 

regarded  as  a  unit  the  same  is  true.  It  produces  for  itself,  and  the 
burden  of  its  final  labor  measures  the  utility  of  its  final  products, 
which  is  the  same  as  the  effective  utility  of  any  of  its  products 
created  by  the  same  expenditure  of  working  time.  Take  away  the 
articles  that  the  society  gains  by  the  labor  of  a  morning  hour,  the 

"Clark,  op.  cit.,  p.  380.  "/fctd.,  p.  381. 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        465 

necessary  food,  clothing  and  shelter  that  it  absolutely  must  have, 
and  to  make  good  the  loss  it  will  divert  the  work  performed  at  the 
approach  of  evening,  which  would  otherwise  have  produced  the  final 

luxuries  on  its  list  of  goods The  things  otherwise  produced 

by  that  final  labor  will  be  the  ones  really  lost,  and  their  utility  is  meas- 
ured by  the  burden  entailed  in  the  creating  of  them Every- 
thing that  is  produced  by  one  hour  of  social  labor,  whether  that 
labor  be  performed  early  in  the  day  or  late,  possesses  an  effective 
social  utility  that  equals  the  absolute  utility  of  the  final  complement 
of  goods  consumed;  and  this,  again,  is  counterpoised  and  measured 
by   the   sacrifice   which   all    society   undergoes    in   the   labor   of    its 

final  hour Periods  of  labor  are  equal  in  effective  disutility, 

and  this  makes  it  possible  to  use  the  labor  of  any  period  of  a  given 

length    as    a    unit    for    measuring    values In    the    subjective 

valuations  of  society,  as  an  organic  whole,  the  product  of  two  hours' 
labor  is  always  worth  just  twice  as  much  as  is  the  product  of  one. 
Mere  labor  time  is  an  accurate  gauge  of  the  values  of  different 
complements  of  goods." 

But  a  group  of  goods  to  serve  as  a  social  unit  of  con- 
sumption is  one  thing,  and  the  separate  items  made  by 
different  individual  men  may  be  another;  is  "mere  labor 
time  ....  also  an  adequate  gauge  of  the  values  of  the 
different  articles  that  enter  into  the  complement"?  Here 
the  answer  appears  to  be  that  the  utility  of  what  I  sell  is 
measured  by  the  pain  of  society  in  producing  what  I  get 
in  exchange  for  what  I  sell :  "The  pain  that  all  other  men 
suffer  in  making  products   for  him  represents  the  cost  to 

them  of  what  they  get  from  him Price  is,  then, 

an  indication  of  the  social  cost  of  acquisition  of  different 
commodities."  '° 

Recalling  now  that  each  unit  of  labor  commands  under 
normal  conditions  precisely  the  same  remuneration  as  every 
other  unit,  we  become  interested  to  know  how  much  labor 
of  any  given  individual  constitutes  a  labor  unit.  Evidently, 
laborers  are  not  paid  the  same  per-diem  wage,  but  only  the 
same  wage  per  labor  unit : 

^'  Ibid.,  pp.  383-89,  passim. 
""Ibid.,  p.  391. 


466  V.\LUE  AND  DISTRIBUTION 

A  laborer  of  high  grade  embodies  in  himself  more  units  of  labor 
than  does  an  inferior  one."^ 

The  final  unit  of  labor  is  the  sacrifice  entailed  by  a  quantity  of 
distinctly  social  labor.^ 

A  social  unit  of  labor  ....  is  a  composite  unit  consisting  of 
some  labor  from  every  industrial  group  that  the  community  con- 
tains." 

A  minute  would  be  a  larger  fraction  of  one  man's  day  than  of 
another's.  It  is  accurate  enough  for  our  purpose,  however,  to  say 
that  the  social  labor  is  made  up  of  a  fixed  fraction  of  a  day's  labor 
of  every  individual."* 

Evidently  it  does  not  matter  what  precise  quantity  of 
this  social  labor  is  taken  as  the  unit  of  measurement ;  but 
take  now  the  case  of  a  man  who  makes  and  upon  the 
market  sells  a  commodity: 

A  commodity  is  actually  measured  for  value  on  the  basis  of 
the  social  service  that  it  renders All  society,  in  the  end,  in- 
curs a  marginal  sacrifice  that  measures  the  vabie The  indi- 
vidual labor  which  made  the  commodity  is  the  economic  equivalent 
of  the  social  labor  that  is  induced  by  it  and  that  measures  its  value." 

But  how  does  a  man  actually  go  to  work  to  exercise 
this  inducing"  power  over  the  social  labor?  Evidently  he 
sells  his  product  upon  the  market : 

If  money  is  used  in  the  transactions,  and  if  the  price  of  IV  and 
that  of  X  are  equal,  it  is  because  the  last  unit  of  supply  of  each 
commodity,  as  it  is  made  over  to  the  miniature  society  for  con- 
sumption, imparts  to  society  as  a  whole  a  uniform  addition  to  its 

enjoyments Price  is,  then,  an  indication  of  the  social  cost  of 

acquisition   of   different  commodities.^* 

Thus  are  we  able  to  know  how  much  of  each  man's 
labor  is  necessary  to  constitute  a  unit  of  labor ;  and  then 
we  know  that  these  amounts  of  labor  will  be  equally  paid — 
these  funded  equal  units ;  and  how  do  we  know  this  ?  By 
the  fact  that  in  selling  them  upon  the  market,  they  will 
draw  out  equal  quantities  of  social  labor.  But  this  means 
that  the  products  sell  for  the  same  money  price,  and  that 
the  two  quantities  of  labor  are  equal  quantities  by  the  mere 
fact  of  the  equal  market  values  of  their  products.  And  yet 
Clark  has  only  a  few  pages  back  insisted  that  it  will  not  do, 

'"Clark,  ofy.  cit.,  p.  63.  ^  Ibid.,  p.  170.  ^^  Ibid.,  p.  397. 

'Ubid.,  p.  378.  '^Ibid.,  p.  396.  '"Ibid.,  p.  391. 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        467 

in  good  logic,  to  make  "the  product  ....  the  basis  of 
measurement.  If  we  say  that  whatever  produces  a  unit  of 
consumers'  wealth  is  a  unit  of  capital,  we  assert  nothing 
by  adding  that,  at  any  one  time,  all  units  of  capital  are 
equally  paid."  -' 

We  have  now  to  recall  that  in  Clark's  view  this  resolu- 
tion of  market  value  into  some  sort  of  underlying  and  con- 
trolling and  determining  homogeneity  is  absolutely  essential 
to  the  funding  of  capital  goods  and  of  labor  into  value 
units,  and  likewise  essential  to  the  proof  that  in  each  fund 
the  compensations  tend  to  be — and  normally  are — the  same 
for  all  of  the  units.  That  is  to  say,  Clark  rests  the  specific- 
productivity  theory  of  distribution  upon  two  bases,  (i)  that 
market  values  can  be  reduced  to  an  ultimate  homogeneity 
in  terms  of  effective-utility  units,  it  being  for  this  purpose 
that  the  social-organism  concept  is  invoked  for  service ; 
(2)  that  all  productive  agents,  on  the  one  hand,  and  all 
productive  instruments,  on  the  other  hand,  are  likewise 
subjected  to  the  funding  process,  in  such  fashion  that  equal 
value  productivity  may  be  ascribed  to  the  individual  units 
of  each  fund,  and  this  without  appeal  to  the  quantum  of 
value  productivity  as  determining  or  defining  the  unit. 

It  is,  indeed,  possible  that  Clark  has  admitted  here 
more  than  the  necessities  of  the  argument  require ;  it  is 
conceivable  that  neither  of  these  intermediate  steps  is 
essential  to  the  conclusion ;  it  may  be  that  the  specific  pro- 
ductivity of  the  productive  factors  may  be  worked  out, 
and  distributive  shares  be  found  to  be  the  precise  cor- 
relatives and  equivalents  of  specific  productivity,  and  all  this 
without  appeal  to  any  sort  of  homogeneity  underlying  and 
determining  market  values,  and  without  any  manner  of 
recourse  to  the  funding  devices  proposed.  How,  indeed, 
disprove  it? 

And  it  is  also  forthwith  to  be  admitted  that  no  proof  has 
yet  been  offered — or  can  later  be  adduced — that  society  is 
not  an  organism;  but  it  is  equally  certain  that  no  proof  has 
yet  been  anywhere  adduced  that  it  is ;  and  it  is  worth  noting 
that   the    sociologists    themselves    have    long   since    mostly 

"Ibid.,  p.  374. 


468  VALUE  AND  DISTRIBUTION 

abandoned  the  doctrine.  But  none  the  less  may  the  doc- 
trine be  true,  and  fertile  of  more  truth;  this,  however,  is 
sheer  matter  of  faith;  and,  as  all  propositions  purely  of 
faith  are,  it  is  at  once  unproved,  unprovable,  and  undis- 
provable.  And  so  likewise  it  may  be  true  that  the  social 
organism  has  methods  of  funding  labor  and  of  funding 
capital  that  we  wot  not  of;  and — possibly  enough — these 
capital  and  labor  value  funds — organically  valued — are  not 
derivative  from  the  valuations  organically  placed  upon  the 
products.  We  can  deny  no  part  of  this  in  any  sense  of 
thinking  ourselves  able  to  prove  its  falsity;  to  prove  that 
water  babies  do  not  exist,  we  must,  Kingsley  tells  us,  do 
more  than  not  see  any  water  babies  existing,  we  must  see 
a  water  baby  not  existing.  We  can,  then,  do  no  more  than 
to  put  in  issue  and  to  criticize  the  evidence  or  arguments, 
if  any  have  been  offered,  in  support  of  the  position  taken. 
Any  criticism  made  or  yet  to  be  made  must  mostly  confine 
itself  to  questioning  the  logical  legitimacy  of  this  estab- 
lishing of  fundamental  propositions  purely  by  faith,  and  to 
a  scrutiny  of  the  logical  tenability  of  the  relations  asserted 
or  assumed  between  these  dubiously  authorized  proposi- 
tions. 

But  if,  even  faith-wise,  these  factor  funds  can  be  estab- 
lished upon  any  other  than  the  repudiated  basis  that  "what- 
ever produces  a  unit  of  consumers'  wealth  is  a  unit  of 
capital,"  the  explanation — if  explanation  it  is — must  appar- 
ently run  substantially  as  follows : 

Just  as  "effective  utility  ....  is  measured  by  society 
as  a  whole,"  and  as  "the  measurement  of  well-being,  thus 
regarded  in  the  abstract,  is  an  occult  but  dominant  fact  in 
exchanges,"  and  as  "in  this  lies  the  significance  of  the 
phrase  'measure  of  effective  utility,'  ....  it  was  upon 
the  word  'social'  that  emphasis  was  laid ;"  precisely  so,  by 
some  occult  social-organism  process,  do  we  get  an  appraisal 
and  a  funding  of  capital  goods  and  of  labor, — a  funding 
non-derivative  from  those  volumes  of  value  product  ascribed 
and  imputed  to  these  productive  factors, — and  all  this,  also, 
in  such  fashion  that  both  a  mystical,  occult,  and  marvelous 
parallelism  and  a  precise  proportionality  are  discoverable 
between  the  value  of  the  funded  unit  and  the  value  of  its 
product. 

But  even  if  this  social-organism  method  of  getting 
products   and   productive    factors    into   abstract    funds   be 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        469 

abandoned  as,  on  the  one  hand,  unproved,  and  as,  on  the 
other  hand,  unserviceable  for  its  purpose  unless  logically 
abused,  the  productivity  theory  of  distribution  need  not,  be 
it  repeated,  thereby  become  untenable.  It  seems,  indeed, 
that  Clark  has  overestimated  or  wrongly  located  the  diffi- 
culties of  his  problem ;  and  it  must  be  remembered  that  it 
is  primarily  this  problem,  and  not  Clark's  solution  of  the 
problem,  that  is  of  interest  to  our  investigation.  Take  it  to 
be  established,  if  we  may,  that  market  values  will  not 
reduce  to  pain  jelly  or  to  utility  jelly,  whether  by  the  social- 
organism  concept  or  by  any  other  method ;  the  case  of  the 
productivity  theory  of  distribution  is  not  forthwith  to  be 
declared  hopeless,  if  only  it  be  true  either,  (i)  that  the 
funding  expedient  is  not  essential,  or  (2)  that  without  any 
appeal  to  the  hypothetical  psychology  of  the  social  organ- 
ism, the  market  values  of  products  and  of  factors  may  be 
made  homogeneous  on  some  sort  of  workable  basis ;  and  it 
need  not  matter  whether  this  other  basis  be  something  dis- 
tinct from  pain  cost  in  the  getting  or  from  well-being 
significance  in  the  using. 

It  is,  in  any  event,  worthy  of  remark  that  the  market 
values  of  products  and  the  market  values  of  factors  are 
actually  and  patently  homogeneous  under  the  simple,  every- 
day, and  commonplace  guise  of  market  price,  a  homogeneity, 
that  is  to  say,  in  terms  of  the  money  fact,  a  con- 
'vcntional  standard  admirably  adapted,  as  expressive  of 
homogeneous,  undifferentiated  purchasing  power,  for  meet- 
ing all  the  requirements  of  this  greatly  desired  homo- 
geneity. What,  in  fact,  can  capital  as  an  abstract  fund 
possibly  be,  if  it  be  anything  other  than  a  market- value 
fund?' 

But,  even  so,  we  are  immediately  driven  back  upon  the 
problem  of  how  to  make  use  of  this  homogeneity  in  such 
wise  as  to  help  forward  the  problem  in  hand,  which  is, 
in  part,  precisely  this  of  how  to  explain  these  very  market 
values  or  hires  upon  these  productive  factors.  For  it  must 
still  remain  true,  as  Clark  has  so  well  pointed  out,  that 
neither  capital  units  nor  labor  units,  no  matter  in  what 
manner  or  how  well  funded,  can  logically  be  asserted  to 
possess  equal  value  productivity  and  so  to  be  equally 
rewarded  in  value  compensations,  if  all  the  while  the  units 
are  explained  and  established  as  such,  only  by  the  fact  that 
they  produce  equal  values  or  get  equal  compensations. 


470  VALUE  AND  DISTRIBUTION 

We  seem  compelled,  then,  to  adventure  the  problem 
under  its  other  statement,  how  to  explain  the  remunera- 
tions attributed  by  the  market  to  the  different,  specific,  con- 
crete factors  and  items  employed  and  remunerated  under 
the  productive  process?  Is  it  possible  to  regard  the 
remunerations  as  either  normally  or  actually  the  precise 
equivalent  of  the  productive  contribution?  How  deter- 
mine this  separate  productivity  for  comparison  with  the 
remuneration?  Is  any  method  of  isolation  of  factors 
possible?  Or  is  all  that  can  be  said  merely  that  the 
remuneration  is  the  market  value  of  the  value-productivity 
contribution  rather  than  the  precise  equivalent  of  the 
value  contribution?  To  this  aspect  of  the  problem,  which, 
after  all,  seems  to  be  treated  by  Clark,  we  must  now  direct 
attention.-^ 

But  precisely  what  is  our  problem?  It  is  clear  that  we  are 
not  now  interested  in  any  issue  as  to  whether  cost  causes 
value  or  value  causes  cost,  or  as  to  whether  distributive 
shares  are  better  regarded  as  primary  or  as  secondary; 
no  denial  is  suggested  that  all  productive  instruments 
and  agents  are  hired  in  view  of  the  value  products 
to  be  derived  from  them ;  so  far  as  this,  at  least,  the  value- 
productivity  theory  of  distribution  must  be  genially 
accepted ;  nor  is  there  question  that  the  amount  of  value  in 
the    joint   product    of   the    factors    is    the    equivalent,    the 

^'  "The  specific  productivity  of  labor  fixes  zvages — that  is  the  thesis 
to  be  supported  in  this  volume"  (p.  47). 

"We  have  said  that  the  specific  productivity  of  labor  fixes  wages ; 
and  this  means  that  pay  conforms  to  the  amount  of  product  that  is 
specifically  imputable  to  any  one  unit  of  labor  in  a  working  force. 
This  implies  that  the  products  of  the  different  units  are  equal.  In 
like  manner,  the  specific  productivity  of  capital  fixes  interest.  The 
earnings  of  a  dollar  are  what  the  dollar  creates  ;  and  this  implies  that  in 
any  one  fund  of  capital,  as  it  is  described  in  terms  of  money,  the 
products  of  all  the  different  dollars  are  equal"  (p.  49). 

"A  laborer's  income  may  seem  to  come  to  him  from  another  man  ; 
but  in  essence  it  is  still  the  response  that  nature  makes  to  his  own 
labor — it  is  his  own  virtual  product"  (p.  53). 

"The  income  of  each  subgroup  is  now  the  value,  not  of  a  completed 
article,  but  of  the  one  particular  utility  that  it  imparted  to  that  article" 
(p.  54). 

"Paying  interest  is  [sometimes?]  buying  the  product  of  capital  as 
paying  wages  is  buying  the  product  of  labor.  The  power  of  capital  to 
create  product  is,  then,  the  basis  of  interest"  (p.  135). 

"As  value  depends  on  final  utility,  so  shares  in  distribution  depend 
on  final  productivity"  (p.  208). 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        47 1 

source,  and  the  intermediate  determinant  of  the  aggre- 
gate compensations  distributed  to  these  factors,  it  matter- 
ing not  at  all  for  present  purposes  how  this  total  value  to 
be  distributed  was  caused  or  fixed;  nor  are  we  tempted  to 
deny  that  each  of  these  distributed  compensations  falls 
out  in  some  general  and  approximate  proportionality  with 
the  value  increase  contributed;  but  rather  are  we  con- 
cerned to  determine  whether  any  separate  and  specific 
productivity  of  the  different  co-operating  productive  fac- 
tors can  be  so  isolated  and  distinguished  that,  actually  or 
logically,  the  compensation  may  be  declared  to  be  the  pre- 
cise equivalent  of  the  productivity  contribution.  That  is 
to  say,  what  is  the  meaning  and  what  the  warrant  of  the 
assertion  that  out  of  the  distribution  of  a  joint  product  the 
different  productive  agents  receive  the  precise  equivalent 
of  the  value  which  they  have  contributed?  Is  it  true  that 
this  precise  productivity  can  be  arrived  at  otherwise  than 
by  sheer  reference  and  appeal  to  what  they  get? 

This  is,  in  truth,  our  old  problem  of  imputation,  the 
problem  already  considered  at  length  in  an  earlier  chapter, 
how  to  distribute  between  the  different  co-operating  factors 
not  only  all  the  value  product  which,  if  not  so  co-operat- 
ing, they  might  have  produced,  but,  together  with  this,  that 
increment  or  surplus  of  product  which  accrues  as  the  very 
result,  as  it  was  the  very  purpose,  of  their  co-operation. 

Assume  that  in  isolated  uses,  or  in  other  combinations, 
each  of  four  productive  facts,  e.  g.,  land,  machines,  wage- 
earners,  and  entrepreneur,  could  command  3  of  recom- 
pense, and  that  when  the  four  are  brought  together,  their 
aggregate  product  is  not  12  but  13 ;  what  distributive 
principle  shall  be  invoked  to  apportion  this  surplus  of  i  ? 
If  the  first  of  Clark's  principles  of  imputation  be  accepted, 
namely,  that  "the  amount  that  is  taken  from  the  crop  when 
one  cultivator  is  withdrawn  from  the  force,  measures  the 
effective  productivity  of  every  laborer  of  like  personal 
capacity,"  ^^  this  subtraction  method  will  lead  us  to  impute 
to  each  co-operating  factor  a  specific  productivity  of  4, — 
and  this  despite  the  obvious  fact  that  the  joint  product  is 
not  16  but  13. 

Clark's  second  principle  of  imputation  he  does  not  him- 
self recognize  to  be  a  second,  but  only  the  repetition  of  the 

^^  Clark,  op.  cit.,  p.  161. 


472  VALUE  AND  DISTRIBUTION 

first:  "A  similar  test  might  have  been  made  merely  by 
adding  a  unit  of  labor,  instead  of  taking  one  away."  But 
if  this  principle  be  accepted  we  shall  come  into  precisely 
the  reverse  difhculty.  For  if  the  proportions  of  factors  in 
the  original  complex  were  the  correct  proportions — if,  for 
the  entrepreneur,  the  combination  was  the  best  combina- 
tion— no  increase  in  any  one  factor  alone  could  take  place 
without  its  per-item  productivity  suffering.  It  follows  that 
the  method  of  "adding  a  unit  of  labor  instead  of  taking 
one  away"  would  distribute  a  product  somewhat  smaller 
than  the  actual  product. 

But  when  it  is  known  what  any  particular  entrepreneur 
will,  at  the  maximum,  bid  for  the  item  in  question  to  be 
used  as  part  of  his  production  complex,  under  his  own 
direction,  is  it  safe  to  attribute  all  of  the  increase  in  product 
to  the  new  item?  Is  not  this  increase  due  rather  to  the 
mere  "togetherness"  of  all  of  the  co-operating  facts?  And 
is  it  not  certain  that  other  entrepreneurs  in  different  cir- 
cumstances and  of  different  abilities  must  have  different 
maximum  bids?  And  which  one  out  of  all  these  different 
productivity  relationships  gauges  the  specific  productivity 
of  the  item  in  question?  And  does  the  market  hire  neces- 
sarily or  probably  exhaust  all  the  value  significance  of  the 
item  to  the  successful  bidder?  And  are  not  the  cases  where 
this  is  even  approximately  true  confined  to  those  produc- 
tive factors  which  are  present  in  stocks? 

Substantially  the  same  difficulties  exist  for  all  attempts 
at  the  isolation  of  productive  factors;  zones  of  indiffer- 
ence, in  the  sense  of  zones  of  isolation,  are  not  to  be  found. 
If  labor  could  somewhere  be  found  supplied  with  no  tools, 
or  with  valueless  tools,  and  working  upon  valueless  land, 
this  would  be  labor  suffering  in  compensation  by  reason 
of  a  limitation  of  product  due  to  inadequacy  of  equipment. 
Where  "the  worn  tool,  the  rickety  engine,  the  unseaworthy 
ship  ....  is  at  the  point  of  abandonment,  the  labor 
that  uses  it  creates  only  wages ;"  this  is  true,  but  not  full 
wages.  It  is  therefore  not  true  that  "the  amount  of  this 
product  corresponds  with  and  expresses  the  rate  of 
general  wages,"  ^^  and  would  not  be  true  even  if  all  labor- 
ers were  alike  in  their  relations  either  to  equipment  or  to 
entrepreneurs. 

Nor — adapted  to  Clark's  proposition — is  there  any  zone 

*"  Qark,  op.  cit.,  p.  97. 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        473 

of  indifference,  or  place  of  isolation,  for  the  last  or  mar- 
ginal worker  employed  by  any  entrepreneur : 

It  is  this  most  sterile  of  the  fields,  openings,  or  opportunities  for 
labor  that  we  describe  graphically  as  an  outermost  zone  within 
which  men  produce  only  their  wages.  This  is  the  zone  of  indiffer- 
ence from  an  employer's  point  of  view,  because,  if  he  sets  men 
working  within  this  area,  he  must  give  them  all  that  they  produce 
as  wages." 

But,  at  the  most,  he  needs  do  this  only  upon  the  assump- 
tion that  he  is  the  marginal  employer,  and  upon  the  added 
assumptions,  also,  that  the  employees  are  all  alike  and  that 
there  is  nothing  peculiar  in  them  or  in  him  or  in  his  land 
or  other  capital  so  that  another  employer  may  not  push  him 
to  his  highest  possible  bid.  And  even  upon  these  assump- 
tions, there  is  no  reason  for  supposing  that  even  the  last 
laborer  is  hired  at  precisely  no  gain ;  the  employer  may 
well  have  some  unexhausted  powers  of  stipervision  still 
left  in  him.  And  so,  "if  one  employer  offers  to  them  less 
than  by  their  productive  powers  [working  for  and  under 
him]  they  are  worth  [to  him]"  there  is  no  sufficient  war- 
rant for  the  belief  that  "another  will  offer  more,  pro- 
vided competition  is  perfectly  free  and  efficient." 

It  is,  then,  a  most  dubious  doctrine  that  the  last  laborer 
hired  by  the  marginal  employer  is  hired  at  no  gain.  Is 
there  any  good  reason  for  supposing  the  extended  super- 
vision of  the  employer  to  be  non-productive?  Why,  then, 
does  he  exercise  it?  And  if  it  be  urged  that  because  of 
limited  command  of  capital  some  of  the  supervising  abili- 
ties of  the  employer  must,  in  any  case,  run  to  waste,  it  is 
to  be  replied  that  this  argument  recurs  to  an  assumed 
peculiarity  in  the  employer's  situation,  and  so  far  aban- 
dons the  attempt,  to  explain  the  wages  as  reflecting  the 
isolated,  objective,  value-producing  power  of  the  laborer. 
For  note  that  the  isolated  and  objective  productivity  in 
question  is  not  to  be  established  even  upon  the  assump- 
tion that  the  production  takes  place  upon  marginal  land 
only,  or  at  the  marginal  powers  of  land,  and  with  the  co- 
operation of  only  marginal  capital  or  the  marginal  powers 
of  capital ;  it  must  also  be  assumed  that  the  production  is 
marginal  in  its  relation  to  that  marginal  entrepreneur,  and 
to  the  supervisory  productive  powers  of  that  entrepreneur, 

''  Clark,  op.  cit.,  p.  no. 


474  VALUE  AND  DISTRIBUTION 

who  can  pay  least  for  the  labor  and  who,  hiring  it,  pays  at 
the  same  time  all  that  he  can. 

And  now,  assuming  even  this  case  of  utmost  payment — 
a  payment  leaving  no  least  residue  of  rent  or  interest  or 
personal  compensation  for  the  comfort  of  the  employer — 
where  all  the  produced  increment  goes  to  the  laborers  and 
goes  as  their  distinct  and  unquestioned  value  productivity, 
it  becomes  so  much  the  clearer  that  the  wage  outlays  of  the 
marginal  employer  are  not  fixed  by  him,  but  fixed  for  him ; 
he  has  no  share  in  the  results  as  fixed,  except  to  the  extent 
that  as  one  item  in  the  demand  schedule,  his  demand  has 
prevented  that  still  lower  wage  which  would  have  attended 
the  throwing  of  these  laborers  over  to  the  employment  of 
some  still  less  efficient  and  still  weaker  entrepreneur.  But 
as  in  such  case  the  wages  must  admittedly  have  been  lower 
under  this  otherwise  excluded  employer,  it  follows  that  to 
our  marginal  employer,  or  to  his  entire  productive  complex 
as  a  unit,  there  must  be  ascribed  some  part  of  that  pro- 
ductivity which  Clark's  analysis  imputes  to  the  laborer 
alone. ^- 

^"  Clark  himself  recognizes  the  importance  of  the  productive  com- 
plex— recognizes,  that  is, — as  perhaps  in  view  of  his  abstract-capital  con- 
cept he  logically  must, — that  each  added  dose  of  capital  takes  the  form 
not  of  a  quantum  of  machinery,  or  of  land,  or  of  cars,  or  of  rails,  etc., 
but  of  a  complex  or  complement  of  co-operating  factors,  all  applied  under 
the  guise  of  an  item  or  dose  of  productive  outlay,  a  unit  sum  of  capital 
expense  ;  and  this  is  admirable,  only  that  it  is  assumed  that,  in  concrete 
manifestation,  this  capital  outlay  must  take  the  form  and  guise  of 
material  capital  goods,  rather  than  be  applied  in  toto  or  in  varying 
fractions  to  all  lines  of  gainful  expenditure,  inclusive  of  labor,  insur- 
ance, advertising,  taxes,  and  what  not : 

"Here,  for  instance,  is  a  new  locomotive.  It  has  not  been 
secured  ....  to  take  the  place  of  one  worn  out,  but  is  an  additional 
engine,  made  necessary  by  an  enlarged  traffic.  Is  it  a  final  increment 
of  capital  ?  ....  It  would  be  uneconomical  to  combine  one  poor 
engine  with  an  equipment  of  good  cars,  good  rails,  etc.  This  comple- 
mentarity   of    producers'    goods    must    always    be    considered 

The  quality  of  the  new  engine  is  determined  by  that  of  the  roadbed,  the 
rails,  the  bridges,  the  cars,  etc.,  with  which  it  is  used"  (p.  248). 

But  note  that  this  really  denies  any  distinguishable  and  specific 
productivity  in  the  separate  items  of  capital  goods  ;  and  note  also  that 
this  same  argument  applies  in  principle  to  all  combinations  of  capital 
with  labor,  or  of  capital  goods  with  other  capital  goods,  or  of  labor 
with  other  labor, 

"The  competition  for  capital  ....  is  an  all-around  struggle  to 
get  concrete  things  that  are  about  to  be.  The  capital  of  society  has  no 
existence  till  it  is  in  the  shape  in  which  entrepreneurs  use  it.  Till  it  is 
raw    materials    and    tools    for    the    manufacturer,    merchandise    for    the 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        475 

But  we  have  now  to  notice  a  still  more  important  and 
still  more  disastrous  error  in  this  method  of  analysis : 

The  product  that  can  be  attributed  to  this  second  increment  of 
labor  is,  of  course,  not  all  that  it  creates  by  the  aid  of  the  capital 
that  the  earlier  division  of  workers  has  surrendered  to  it;  it  is  only 
what  its  presence  adds  to  the  product  previously  created." 

This  is  crucial ;  in  point  of  fact,  the  new  labor  does  not 
get  all  the  increase ;  the  conditions  of  distribution  are  dis- 
turbed to  the  advantage  of  the  capital ;  wages  are  suffering 
not  merely  from  the  fact  of  a  diminishing  production  incre- 
ment, but  also  from  the  fact  that  out  of  this  situation  every 
unit  of  capital  is  deriving  an  increased  income;  that  is  to 
say,  wages  are  suffering  not  only  on  the  production  side 
but  on  the  distribution  side. 

The  fundamental  error  in  all  analysis  of  this  sort — and 
the  later  economics  is  full  of  it — is  traceable  to  the  assump- 
tion that  the  marginal-utility  analysis  for  the  individual 
man  can  safely  be  carried  over  to  society  as  a  whole,  and 
also  that  the  method  of  computation  supposedly  valid  for 
consumption  goods  can  safely  be  applied  to  production 
goods  disposed  of  under  entrepreneur  bidding: 

There  is  a  commercial  principle  which  causes  the  final  or  mar- 
ginal part  of  the  supply  to  be  strategic  in  its  action  on  the  value 
of  the  whole  group.  The  value  of  the  whole  crop  ....  conforms 
to  that  of  the  marginal  bushel.  If  there  are  marginal  laborers, 
in  the  sense  in  which  there  are  marginal  quantities  of  wheat,  cotton, 
iron,  etc.,  then  the  final  or  marginal  men  are  likewise  in  a  strategic 
position;  for  their  products  set  the  standard  of  everyone's  wages. 
....  The  last  increment  in  the  supply  of  any  commodity  fixes  the 
general  price  of  it.^* 

retailer,    vehicles    for    the    carrier,    etc.,    capital    has    no    existence    at 

all Bidding     for     capital,     then,     is     bidding     for     something 

which  ....  will  consist  mainly  in  a  change  of  quality  of  working 
implements"  (p.  259). 

"The  final  increment  of  the  capital  of  this  railroad  corporation  is, 

in   reality,  a  difference  between   two   kinds   of  plants One   of 

these  is  the  railroad  as  it  stands The  other  is  the  road  built 

and  equipped  as  it  would  have  been  if  the  resources  had  been  one 
degree  less"  (p.  251).  All  this  presents  the  social  concept  of  capital 
rather  than  the  competitive. 

**  Clark,  op.  cif.,  p.   176. 

^*  Ibid.,  p.  90. 


476  VALUE  AND  DISTRIBUTION 

The  difficulties  are  thus  several  in  the  way  of  this 
method  of  solution  of  the  distributive-imputation  problem: 

1.  With  complementary  production  goods,  no  separate 
and  specific  significance,  like  that  attached  to  consumption 
goods,  can  be  ascribed  to  any  one  item. 

2.  Changes  in  the  relative  supplies  of  co-operating 
goods  work  changes  in  the  relative  significance  of  all  the 
different  classes  of  the  co-operating  goods. 

(Propositions  (i)  and  (2)  would  hold  either  in  a  Cru- 
soe or  in  a  competitive  economy.) 

3.  In  the  competitive  economy  all  possibility  of  ascrip- 
tion of  a  single  productive  significance  to  any  productive 
item  disappears ;  the  entrepreneurs  being  different  in  equip- 
ment and  in  degrees  and  kinds  of  skill,  each  item  has  as 
many  different  productive  potentialities  as  there  are  differ- 
ent productive  complexes.  There  can,  therefore,  be  no  one 
degree  of  productivity  assignable  as  the  specific  produc- 
tivity of  any  particular  item;  and  there  is  no  warrant  for 
supposing  that  the  hire  paid  by  the  successfully  bidding 
entrepreneur  coincides  with  even  his  own  appraisal  of  the 
prospective  increased  efficiency  of  his  productive  complex. 
The  successful  bidder  pays  at  the  minimum  what  someone 
else  will  pay ;  at  the  maximum,  all  that  he  can  afford  to 
pay;  but  that  he  is  the  successful  bidder  does  not  imply  that 
he  actually  pays  this  maximum. 

4.  Even  were  productive  factors  always  present  in 
stocks  rather  than— as  generally— in  concretely  differing 
items,  an  entire  competitive  society  would  have  no  way 
of  adding  one  marginal  item  of  an  increasing  stock  to  a 
fixed  and  stable  volume  of  complementary  stocks ;  even  the 
individual  does  not  commonly  proceed  in  this  way,  but 
rather,  as  he  enlarges  his  business  unit,  enlarges  it  in 
several  directions  at  once.  In  competitive  society,  stocks 
and  classes  of  production  goods  do  not  take  one  after 
another  each  its  separate  turn  in  the  process  of  increase.-'*^ 

°'  The  precise  relation  of  the  marginal  analysis  to  the  specific  value- 
productivity  issue  will  be  brought  out  in  clearer  definition  by  an  account 
of  a  recent  controversy  between  Professor  Carver  and  -Mr.  J.  B. 
Hobson :  Hobson,  "Marginal  Units  in  the  Theory  of  Distribution," 
Journal  of  Political  Economy.  September,  1904;  Carver,  "The  Mar- 
ginal Theory  of  Distribution,"  Journal  of  Political  Economy,  March, 
1905  ;  and  Hobson,  "The  Marginal  Theory  of  Distribution,"  Journal 
of  Political  Economy,  September,  1905. 

In    the    preceding    chapter    some    account    was    given    of    Hobson's 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        477 

repudiation  of  the  "dosing"  method  of  analysis  and  of  its  purported 
bearing  upon  the  relations  of  land  rent  to  cost ;  and  the  opinion  was 
there  expressed  that  Hobson's  criticism,  as  formulated  in  his  "Distri- 
bution,"   falls  appreciably   short  of   seriously  damaging  the   doctrine. 

In  his  later  contribution  to  the  discussion  he  adopts,  as  we  shall 
see,  a  dosing  analysis  of  his  own,  but  attacks  with  great  force  and 
cogency  the  notion  that  under  any  dosing  analysis,  properly  applied, 
is  it  possible  to  isolate  and  measure  the  separate  productivity  of  any 
one  of  the  different  productive  factors  in  the  production  process. 
Meanwhile,  and  especially  after  the  reply  of  Professor  Carver,  other 
interesting  issues  are  introduced,  some  of  them  possibly  not  strictly 
germane  to  the  original  question.  Clark's  doctrine  is  necessarily 
involved,   though   Qark  himself  takes  no   part  in  the  discussion. 

Hobson  denies  that  any  entrepreneur,  e.  g.,  a  farmer,  deciding  to 
employ  a  fifth  laborer,  can  properly  regard  the  resulting  increase  of 
product  as  representing  or  expressing  the  value  productivity  of  this 
fifth  man : 

1 .  The  work  of  this  fifth  man,  being  by  assumption  just  like 
that  of  the  other  men,  is  equally  productive,  and  is  paid  for  at  precisely 
the  same  rate,  because  of  this  precise  equality  in  productivity ;  if 
actually  there  is  less  than  five-fourths  of  the  old  product,  it  is  in  part 
because  the  employment  of  the  fifth  man  has  lowered  the  value 
effectiveness  of  each  of  the  other  men. 

2.  If  the  employer's  managerial  capacity  leaves  him  yet  able  gain- 
fully to  supervise  another — a  fifth — man,  it  must  follow  that  a  share 
of  the  increase  in  product  is  to  be  attributed  to  the  utilization  of  a 
fraction  of  managerial  ability  which  hitherto  had  run  to  waste. 

3.  The  doses  applied  are  really  not  labor  doses ;  one  does  not 
make  an  increase  in  the  labor  solely,  but  an  increase  partly  in  labor, 
partly  in  capital,  partly  in  land  ;  the  dose  is  a  land-labor-capital  com- 
posite, and  the  increase  in  product  is  an  increase  which,  if  separately 
attributable  to  anything  in  the  dose  sort,  must  be  imputed  to  this 
composite  dose. 

Hobson  also  argues — perhaps  unfortunately,  at  all  events,  unneces- 
sarily— that  if  the  employer's  payment  were  really  the  full  equivalent 
of  the  productivity  of  the  marginal  man — if  this  marginal  productivity 
were  actually  ascertainable — and  if  the  productivity  theorists  were 
correct  in  asserting  that  this  marginal  productivity  determines  the 
wages  and  expresses  and  measures  the  value  productivity  of  the 
wage-paid  labor,  it  would  thereupon  follow,  inasmuch  as  the  other 
men  are  equally  productive  and  equally  paid,  all  getting  precisely 
what  they  produce,  that  there  could  be  no  gain  in  the  case  for  the 
entrepreneur.  Hobson  holds  that  it  is  precisely  because  the  entrepre- 
neur gets  a  forced  gain,  something  which,  morally,  does  not  belong  to 
him,  that  he  gets  a  profit ;  and  that  Clark  is  justified  in  his  view,  that 
under  the  complete  equilibrium  of  perfect  competition,  in  "normal 
equilibrium,"  all  entrepreneur  profit  would  disappear ;  but  that  there 
is,  on  the  other  hand,  nothing  in  the  competitive  trend  to  bring 
about  this  equilibrium  situation ;  and  that  even  were  it  to  be  estab- 
lished, the  benefit  of  it  would  accrue  not  to  wage-earners  exclusively, 
but  in  part   or  entirely  to  consumers. 

Carver  joins  issue  upon  this  question  of  profit ;  and  taking  profits 
to  indicate  what  is  left  over  "after  the  other  shares  are  paid,"  he 
rightly   proceeds  to   infer  that  competition  can   never  cancel   all   entre- 


478  VALUE  AND  DISTRIBUTION 

preneur  remunerations  ;  and  he  undertakes  a  detailed  analysis  to  show 
that  the  entrepreneur,  in  employing  more  and  more  men,  must  finally 
come  upon  a  man  marginal  for  the  purposes  of  gain — as,  indeed,  he 
must ;  that  what  the  entrepreneur  can  barely  offer  for  this  marginal 
man  is  thereby  established  to  be  what  this  marginal  man  produces ; 
that  the  earlier  men,  as  they  get  no  more,  are  equally  clearly  to  be 
regarded  as  producing  no  more  ;  that  the  excess  in  product  from  the 
earlier  men  over  what  they  receive  is  really  not  their  product  at  all, 
but  is  economically  [and  morally  ?]  the  product  of  him  who  gets  it. 
Seemingly  also,  as  with  Clark,  he  gets  it  because  he  produced  it,  and 
is  known  to  have  produced  it  because  he  gets  it. 

Now  if  one  could  know  precisely  the  sense  in  which  Hobson 
here  uses  the  term  "profit,"  something  could  be  done,  were  it  worth 
while  for  our  purposes,  toward  an  award  of  judgment  upon  the  issue 
as  joined.  Certainly  Carver  is  right  upon  the  profit  issue,  as  he  inter- 
prets profit.  Certainly  also  Hobson  is  wrong  in  asserting  that  where, 
with  four  laborers,  there  is  a  product  of  500,  and  with  five  laborers  a 
product  of  only  100  more,  "the  competition  of  employers,  driving 
down  profits,  will  raise  the  wages  to  120  .  .  .  .if  we  assume  .... 
[that]  the  competition  of  employers  is  as  full  and  free  as  that  of  the 
laborers." 

On  the  other  hand,  Hobson  is  right  in  his  view  that  a  combination 
of  laborers  might  command  approximately  the  whole  600  as  wages, — - 
if  the  employer  must  take  the  five  laborers  or  none. 

But,  by  the  way,  Clark,  with  his  definition  of  profit,  is  also  right 
in  insisting  that  under  the  perfect  competition  of  a  static  situation  all 
profit  would  be  canceled,  since  profit,  as  he  uses  the  word,  connotes 
merely  that  gain  which  is  due  to  non-static  conditions,  or  to  incomplete 
competition,  or  to  both. 

But  such  is  not  the  issue  that  at  present  concerns  us  ;  and  such 
was  not  the  issue  which  it  was  in  Hobson's  purpose  to  present.  Nor, 
accurately  speaking,  does  the  question  whether  the  work  of  the  fifth 
man  is  of  equal  productivity  with  that  of  the  others,  greatly  concern 
us  ;  for  what  does  the  question  really  mean  ?  Does  it  mean  that  it  is 
as  important  to  the  entrepreneur  to  have  one  man  more  to  go  with  the 
four  as  it  was  to  have  a  fourth  man  to  go  with  three  ?  The  question 
as  thus  stated  answers  itself,  and  there  is  no  other  question.  There 
is  no  absolute  productivity  in  this  case  or  in  any  other  case  ;  there 
is  only  productivity  relative  to  the  entrepreneur  and  to  his  situation. 
Hobson  rightly  insists  that  it  is  not  separate ;  nor  is  it  intrinsic,  or 
independent,  or  substantive  ;  like  all  forms  of  utility  or  of  service,  it 
is  a  relation  pure  and  simple.  With  a  different  entrepreneur  it  would 
be  a  different  thing,  another  relation  ;  with  changes  in  this  entre- 
preneur's situation  or  need,  the  significance  of  the  instrument  becomes 
a  new  and  a  different  significance,  simply  because  it  is  a  mere  rela- 
tion. Productivity  can  be  such  only  in  the  sense  of  a  contribution 
toward  value  creation  under  the  particular  terms  and  relations  of  the 
situation  as  it  presents  itself.  The  hire  does  not  express  the  value- 
productivity  contribution,  but  only  the  market  value  of  this  con- 
tribution. 

Hobson's  substantial  repetition  of  Clark's  view  that  the  dose  is 
never  one  of  labor  alone,  or  of  land,  or  of  capital  goods  alone,  but  is 


DISTRIBUTION  BY  VALUE  PRODUCTIVITY        479 

rather  a  land-labor-capital  composite,  a  unit  only  in  the  sense  of  a 
unit  complex,  goes  in  one  direction  somewhat  overfar,  and  in  another 
direction  not  quite  far  enough.  For  surely  with  his  last  dollar  or  last 
thousand  dollars  of  expense,  the  entrepreneur  may  hire  nothing  but 
labor  or  nothing  but  land,  or  nothing  but  capital  g'oods ;  but  as  surely, 
he  may  hire  two  of  them  or  all  three  of  them  together.  Nor  is  it 
true  that  there  is,  under  any  one  situation  or  at  any  one  time,  one 
best  technological  combination  for  each  and  all  entrepreneurs  ;  the 
different  entrepreneurs  being  different  in  degree  and  kind  of  ability 
and  of  equipment,  there  is,  in  truth,  never  any  one  situation,  but  only 
various  situations.  One  entrepreneur  will  apply  his  last  dose  of 
expense  in  one  way,  another  in  another,  and  these  different  ways  may 
none  of  them  be  of  the  "composite"  sort,  or  they  may  all  be  of 
this  sort. 

But,  as  we  have  seen,  the  truth  is  not  far  away  ;  the  dose  with 
each  entrepreneur  is  a  dose  of  outlay,  a  dose  of  purchasing  power,  a 
dose  of  competitive  entrepreneur  capital.  Nowhere  in  economic  theory 
more  seriously  perhaps  than  here  has  the  traditional  threefold  classi- 
fication of  productive  factors  exerted  its  influence  to  perplex  and 
complicate  and  vitiate. 

It  must  be  recognized  here  that,  for  the  purposes  of  this 
problem,  Clark's  notion  of  abstract  capital  has  led  him  to  the  enuncia- 
tion of  what  is  substantially  the  truth.  Without  at  all  concurring  in 
the  dictum  that  "the  idea  that  different  parts  of  a  product  can  be 
created  by  an  entrepreneur  at  greater  or  less  advantage  to  himself  is 
fallacious," — this  notion  seeming  to  cut  away  from  under  Clark's  feet 
the  only  valuable  and  true  thing  in  his  entire  marginal-productivity 
analysis, — the  central  idea  in  the  following  must  command  entire 
approval :  "To  him  it  makes  no  difference  whether  he  hires  one  agent 
or  another  or  the  two  together  since  he  gets  the  same  result  for  the 
same  outlay  in  all  cases"    (p.  365). 


CHAPTER  XXIII 
THE  LAWS  OF  RETURN 

To  have  established  in  economic  theory,  on.  the  one 
hand,  the  distinction  between  long-time  and  short-time 
influences  or,  on  the  other  hand,  the  distinction  between 
the  static  and  the  dynamic  in  value  problems  is,  irrespective 
of  other  and  possibly  greater  grounds  of  obligation,  to 
have  placed  the  science  under  no  small  burden  of  debt. 
These  are,  however,  really  distinct  services ;  for  though, 
at  first  impression,  they  appear  to  rank  as  merely  different 
formulations  of  the  same  principle  of  distinction,  this  is 
seemingly  neither  a  sympathetic  nor  a  fair  interpretation 
of  either. 

Marshall's  long-time  reckoning  points  rather  to  such  nor- 
mal or  static  equilibria  as  are  either  reached  or  always  in  pro- 
cess of  being  reached  within  one  general  and  established  situ- 
ation of  fundamental  conditions ;  the  short-time  reckoning 
allows  for  the  minor  perturbations  and  rearrangements 
which  yet  do  not  imply  movements  or  tendencies  in  the  direc- 
tion of  radical,  permanent,  or  fundamental  change.  Clark's 
even  more  important  recognition  of  dynamic  forces  in 
economic  life  points,  on  the  other  hand,  to  radical  and 
permanent  modifications  in  the  ultimate  determinants  of 
value — changes  in  those  greater  and  ultimately  directive 
forces  which  have  been  here  somewhat  awkwardly  denomi- 
nated situation  facts,  as  the  basis  of  situation  costs. 

It  is,  however,  obvious,  that  the  two  lines  of  distinction 
are  prone  to  coalesce,  and  that  long-run  influences  and 
dynamic  influences,  while  sufficiently  distinct  at  the  extreme, 
shade  off  into  each  other  in  intermediate  cases. 

[The  long-run  price  is  a  normal  price,  a  static  equilibrium 
price  as  distinguished  from  those  actual  and  unstable  prices 
likely   to   obtain   at   any   particular   momentA    That   there 

480  ^ 


THE  LAWS  OF  RETURN  481 

take  place  a  merging  of  actual  price  into  nonnal  price 
requires  the  assumption  both  of  a  static  society  and  of  a 
long-run  period.  Nevertheless,  the  long-run  computation 
is  essentially  one  of  an  ideal,  static,  equilibrium  price,  the 
normal  price,  and  is  a  concept  far  from  new  in  the  science. 
But  up  to  the  time  of  Clark,  the  distinction  between  funda- 
mental change  and  temporary  flux  had  been  only  vaguely 
felt  and  loosely  formulated.^ 

But,  as  has  already  been  urged,  that  the  distinction  be- 
tween long-time  and  short-time  influences  is  recognized  as 
valid  and  illuminating,  does  not  deny  the  cost  relevancy  of 
all  those  influences  whose  effect  is  believed  to  be  transitory ; 
the  distinction  rightly  employed  points  merely  to  the  tempo- 
rary nature  of  these  costs,  to  the  probability  or  the  certainty 
that  they  will  later  be  greater  or  smaller.  It  is,  indeed, 
a  strange  doctrine  that  admits  a  cost  as  temporary  only 
upon  the  assumption  that  it  is  permanent.  The  distinction 
really  points  the  way  to  an  investigation  of  the  influences 
lying  behind  costs,  and  to  the  level  of  costs  which  it  is 
the  trend  of  these  influences  to  establish.  Mere  seasonal 
and  climatic  changes,  droughts  and  crop  failures,  pesti- 
lences, famines,  whims  and  flurries  of  fashion,  stand  as 
static   influences  which   render  the  long-time   computation 

'  "Clearly  there  is  the  necessity  in  economic  reasoning  of  regard- 
ing man  as  the  subject  and  central  point  in  economic  science ;  his 
environment  as  his  opportunity ;  his  industrial  product  as  his  remun- 
eration ;  his  economic  activity  as  his  attempt  to  produce  and  distribute 
this  produce  along  the  lines  of  least  resistance  (sacrifice).  Normal 
price  is  to  be  conceived  as  the  line  of  least  resistance  not  only  for  the 
buyers  and  sellers  directly  engaged,  but  also  for  the  producers  in 
other  employments  searching  for  those  lines  of  activity  affording  the 
highest  remunerations.  Market  prices  are  found  to  fluctuate  in  either 
direction  about  these  normal  or  ideal  prices  and  cannot,  in  the  competi- 
tive adjustment  of  sacrifice,  long  or  widely  depart  therefrom.  In 
short,  the  normal  price  is  that  price  at  which  no  producer  can,  to 
his  own  thinking,  better  employ  himself  in  some  other  line  of  produc- 
tion. Prices  generally  would  stand  at  their  normal,  if  no  producer 
or  consumer  could,  to  his  own  thinking,  advantageously  changie  his 
manner  of  economic  action.  But  like  the  ocean,  market  values  have 
no  rest.  Prices  ripple  and  wave  above  or  below  their  ideal  level,  as 
desires  and  appetites,  opportunities  and  abilities,  slowly  or  rapidly 
change   in   force." — Davenport,    op.   cit.,   sec.    91. 


482  VALUE  AND  DISTRIBUTION 

safer  for  purposes  of  understanding  the  larger  laws  of 
price.  According  to  Marshall,  "the  value  of  a  thing  in  the 
long  run  tends  to  measure  its  cost  of  production"  ;  not  pre- 
cisely that  the  value  of  anything  tends  to  be  fixed  or 
governed  by  its  cost  of  production :  "we  might  as 
reasonably  dispute  whether  it  is  the  upper  or  the  lower 
blade  of  a  pair  of  scissors  that  cuts  a  piece  of  paper;"  but, 
"as  a  general  rule,  the  shorter  the  period  which  we  are  con- 
sidering, the  greater  must  be  the  share  of  our  attention 
which  we  give  to  the  influence  of  demand  on  value ;  and  the 
longer  the  period,  the  more  important  will  be  the  influence 
of  cost  of  production  on  value" :'-  all  of  which  must  be  rec- 
ognized as  valid,  since,  as  we  have  seen,  cost  in  one  industry 
resolves  itself  mostly  into  the  demands  of  other  industries; 
only  in  the  long  run  can  these  opportunity-cost  influences 
make  themselves  adequately  felt.^ 

That,  as  men  acquire  larger  knowledge,  strength,  and 
technical    skill,   they   become   more    effective   producers    of 

-Marshall,   op.   cit.,   pp.    428,   429. 

^  Perhaps  this  is  as  good  a  time  as  any  other  for  working  out  some 
of  the  detail  according  to  which  these  short-time  influences  affect  the 
'ong-time  levels  of  things,  and  are  finally  absorbed  into  the  long-time 
placidity.  What  results  must  commonly  follow  some  price  rise  in  the 
product  of  a  particular  line  of  industry,  this  rise  taking  place,  it 
may  be  assumed,   through  a   change  in  the  habits  of  consumption  ? 

There  must  first  take  place,  in  the  short-time  adjustment,  an 
intensified  utilization  of  all  productive  appliances  in  that  industry, 
a  recourse  to  some  of  the  inferior  powers  of  all  the  lands  and  of  all 
the  other  productive  agents  therein  employed,  and  at  the  same  time 
an  emphasized  call  upon  other  industries  for  instruments,  labor,  and 
materials. 

But  no  very  great  increase  could  be  brought  about  in  the  value  of 
those  productive   agents   existing  in   the  largie   supplies   implied   by  the 
mere    fact   of   their   being   common    to    several    different   industries ;    the 
larger  effect  would  be   felt  by  those  agents   having,    for  the   time  being    \ 
at   least"    an    employment   solely   in    the   particular    industry    in    question. 

But  this  "monopoly"  advantage  would  not  work  itself  out  fully ; 
there  are  in  the  case  important  items  of  friction.  Let  it  be  assumed 
that  these  monopoly  agents  are  competitively  rented  by  owners  to  pro- 
ducers ;  competition  could  hardly  be  so  swift  or  so  effective  as,  with 
rising  prices  of  product,  fully  to  express  the  advantages  in  the  rising 
prices    of    the    intermediate    goods,    thereby    assessing    these    goods    as 


THE  LAWS  OF  RETURN  483 

wealth;  that,  with  larger  and  larger  supplies  of  any  con- 
sumable good,  there  must  go  a  smaller  importance  attach- 
ing to  each  successive  unit  of  supply;  that,  upon  any  given 
area  of  land,  successive  increments  of  product  are  obtain- 
able only  on  terms  of  increasing  difficulty  per  unit  of 
product;  that,  in  many  lines  of  production,  the  greater 
business  has,  in  point  of  economies  of  production,  the 
advantage  over  the  smaller  business — are  propositions  no 
one  of  which  is  markedly  economic  or  technical  in  import, 
or  of  a  nature  to  present  overserious  difficulty  of  compre- 
hension, or  of  a  character  to  offer  especial  temptations  to 
controversy. 

Not  precisely  so,  however,  for  the  same  propositions  as, 
after  subjection  to  the  necessities  of  economic  analysis, 
reinterpretation  for  the  purposes  of  economic  investigation, 
and  reformulation  for  the  purposes  of  economic  doctrine, 
they  present  themselves  transformed  and  rearranged  into 
the  well-known  "economic  laws  of  return." 

Superficially,  though  not  thereby  incorrectly,  regarded, 
the  ordinary  formulations  of  the  law  of  diminishing  return 
may  be  distributed  under  three  heads:     (i)  A  law  of  falling 

higher  costs  of  production.  To  begin  with,  the  machines  could  not  be 
easily  moved  or  sold,  and  competing  producers  could  not  step  into 
possession  of  these  monopoly  appliances  in  their  associated  setting. 
In  fact,  the  advantages  do  not  attach  to  any  monopoly  agent  separately 
and  in  isolation,  but  to  appliances  as  members  of  a  distinct  producing 
gfroup,  with  a  pronounced  interdependency  between  its  various  con- 
stituent members.  Thus  the  problem  of  imputation  within  the  group 
is,  at  least  for  the  short-time  adjustment,  incapable  of  solution  ;  prac- 
tically speaking,  the  gains  would  appear  as  enhanced  profits  of  manage- 
ment ;  but  this  is  crude  in  theory. 

And  were  the  entrepreneur  himself  the  owner  of  the  different 
agents,  the  difficulty  would  be  precisely  the  same  difficulty  ;  he  could 
not  ascribe  to  any  one  agent  the  productive  advantages  enjoyed  by  the 
group.  The  monopoly  goods  might  be — would  be — essential  to  the 
situation,  but  so,  also,  would  the  situation  as  a  whole  be  essential ;  and 
the  entrepreneur's  own  abilities  in  their  relation  to  the  rest  of  the 
situation  would  be  equally  essential.  He  could  not  expediently  rent  or 
sell  the  monopoly  agents  ;  they  would  not  be  practically  mobile  ;  there- 
fore no  alternative  application  would  be  possible  whereby  to  apportion 
their  shares  in  the  group  product.  The  problem  of  complementarity 
is  present  in  an  aggravated  form  ;  the  product  is  simply  and  irreducibly 
a  group  product. 


484  VALUE  AND  DISTRIBUTION 

utility;  (2)  a  law  of  falling  product  by  weight  and  tale,  a 
diminishing  productivity  in  terms  of  concrete,  objective, 
physical  measures;  (3)  a  law  of  falling  value  productivity. 

1.  The  first  formulation  asserts  that  with  successive 
increases  in  the  size  of  the  productive  complex,  the  return  in 
utility  falls  short  of  proportional  increase, — obviously  a 
direct  corollary  from  the  law  of  satiation,  if  not,  indeed,  a 
mere  repetition  of  it;  thus  a  law  of  unquestionable  validity 
for  the  purposes  of  the  individual  reckoning,  and  indirectly 
of  significance  for  problems  of  Crusoe  valuation;  but 
equally  clearly,  a  law  only  vaguely  and  only  average-wise 
applicable  to  group-utility  computations ;  and,  in  any  case, 
a  law  relevant  to  market  value  only  through  the  individual 
comparison  of  competing  utilities. 

It  is,  however,  here  to  be  noted  that,  were  all  the  dif- 
ferent agents  and  instruments  of  production  keeping 
abreast  in  rapidity  of  increase,  this  fact  of  falling  utility 
could  have  no  necessary  bearing  upon  exchange  relations. 
But  equally  for  one  agent  or  for  all  agents  taken  collect- 
ively, the  law  of  diminishing  utility,  of  falling  significance 
with  relation  to  need,  must  hold,  since  it  holds  for  all 
products,  unless,  indeed,  it  is  offset  by  the  fact  of  increasing 
productivity  by  weight  and  tale. 

2.  The  law  of  falling  volume  of  concrete  product,  rela- 
tively to  the  enlarging  productive  complex,  has  evidently 
little  significance  for  purposes  of  any  individual  competi- 
tive reckoning,  otherwise  than  as  the  weight-and-tale  aspect 
of  the  case  transforms  itself  into  a  value-return  outcome. 
And  here,  also,  if  all  agents  were  manifesting  the  same 
rapidity  of  increase,  it  must  follow,  as  will  later  more  fully 
appear,  that  neither  as  volume  nor  as  value  need  any  law  of 
diminishing  return  obtain. 

3.  The  third  rendering  of  the  law,  as  one  of  diminishing 
value  return,  is  the  only  formulation  having  direct  signifi- 
cance for  any  purposes  of  the  competitive  reckoning;  and  in 
this  regard,  also,  it  will  later  appear  that  no  matter  how 
clearly  manifest  the  utility  fall  may  conceivably  be,  there  is 


THE  LAWS  OF  RETURN  4^5 

no  possibility  in  industry  of  a  generally  falling  value  return. 
So,  upon  the  assumption  of  equality  in  the  rates  of  increase 
among  productive  agents,  there  is  possible  neither  a  dimin- 
ishing weight-and-tale  productivity  nor  a  diminishing  value 
productivity. 

Malthus  and  his  successors  long  since  made  it  clear 
enough  that,  looked  at  solely  from  the  point  of  view  of  the 
land  situation,  the  prospects  of  the  human  race  are  not 
encouraging.  Increasing  numbers  of  human  beings  must 
find  the  food  problem  progressively  a  more  serious  prob- 
lem ;  overcrowded  land  is  the  same  thing  as  poor  land ;  a 
larger  and  larger  share  of  human  energies  must,  then,  with 
expanding  population  be  applied  to  the  solution  of  the  food 
problem.  The  law  of  diminishing  return  for  land  is  a 
fundamental  fact  in  human  affairs,  a  fixed,  opaque,  and 
brutal  fact,  full  of  bad  omens  and  sad  prophecies. 

And  more  than  this ;  it  is  evident  that  but  for  this  law  of 
diminishing  return  there  could  be  no  possibility  of  land 
shortage,  or  of  that  inevitable  derivative  of  land  shortage, 
rent.  Thus,  as  with  increasing  population,  there  falls  out, 
per  capita,  a  smaller  product  to  divide,  there  must  also  go 
to  the  landlords  a  larger  and  larger  proportion  of  the  more 
and  more  tragically  inadequate  total.  The  social  classes 
disinherited  of  land  are  doomed  to  a  double  and  compounded 
pressure  of  adversity ;  this  law  of  diminishing  return 
smites  them  with  both  edges  of  its  sword. 

But  the  optimists  also  have  their  innings.  All  this 
would  be  true,  other  things  remaining  the  same.  But 
other  things  are  not  to  remain  the  same;  for  if 
there  is  a  law  of  diminishing  return,  there  is  also,  it  is 
said,  a  law  of  increasing  return.  If,  with  relative 
land  famine,  a  larger  share  of  the  productive  energies  at 
human  disposal  must  be  applied  to  the  land,  it  will  also  be 
true  that,  with  improving  methods  and  processes  in  manu- 
factures, we  can  spare  for  the  land  a  larger  share  of  our 
productive   energies.      Who   knows    that   progress    in    one 


486  VALUE  AND  DISTRIBUTION 

direction  may  not  more  than  make  good  the  deficit  in  the 
other  direction? 

And  not  this  alone ;  progress  is  possible  and  is  probable, 
not  only  in  the  technique  of  non-agricultural  production, 
but  also  in  agricultural  production  itself.  Progress  of  this 
very  sort  has  indeed  been  rapid  even  without  the  increasing 
pressure  of  need.  For  what  has  been  the  meaning  of  the 
redistributions  of  population  especially  characterizing  the 
last  two  centuries?  The  urban  population  has  far  out- 
stripped in  rapidity  of  increase  the  agricultural  population. 
The  growth  of  the  small  city  as  against  the  country,  and 
of  the  great  city  as  against  the  small  city  is  one  of  the 
most  obtrusive  facts  of  modern  life;  the  new  and  agri- 
cultural countries  like  America  and  Australia,  equally  with 
the  older  countries,  manifest  these  population  redistribu- 
tions ;  and  on  the  other  hand,  in  point  of  the  degree  of  the 
tendency,  the  thickly  populated  countries  of  Europe  fall 
not  at  all  behind  the  sparsely  and  newly  settled  countries. 
City  growth  is  general  in  the  modern  world. 

Why  is  it?  It  is  fruitless  to  search  for  the  fundamental 
explanation  in  the  improvement  of  industrial  processes. 
Only  such  men  can  work  in  manufacturing  as  can  be 
spared  from  the  processes  of  food  production.  As  long 
as  the  food  product  from  one  man's  labor  sufficed  for  the 
food  requirement  of  only  one  man,  the  entire  population 
was  compelled  to  occupy  itself  with  agriculture ;  when 
now  one  man's  labor  will  feed  three  men,  two-thirds  of  the 
population  may  be  urban.  So  also,  the  development  of 
transportation  serves  for  the  most  part  to  explain,  not  why 
so  large  a  proportion  of  the  population  is  now  agricul- 
tural, but  only  the  distribution  of  the  non-agricultural 
population.  To  the  extent  solely  that  transportation  has 
opened  up  more  land  or  better  grades  of  land  to  agri- 
cultural uses,  or  is  itself  to  be  ranked  as  one  of  the  pro- 
cesses of  agricultural  production,  is  transportation  respon- 
sible for  the  growth  of  non-agricultural  employment.  And 
precisely   here   it  should   be   remarked  that   to  the   extent 


THE  LAWS  OF  RETURN  4^7 

that,  in  the  production  of  implements  and  appliances, 
manufacturing  is  itself  an  agricultural  process,  to  pre- 
cisely this  extent  industrial  improvement  must  have  aided 
the  relative  growth  of  the  urban  population. 

Improving  transportation,  then,  so  far  as  it  is  not  at  the 
same  time  to  be  regarded  as  improving  agriculture,  has 
had  its  effect,  not  in  emphasizing  the  growth  of  urban 
as  against  'agricultural  population,  but  in  fostering  the 
growth  of  the  small  city  as  against  the  village  and  of  the 
great  city  as  against  the  small  city. 

Looked  at  from  a  more  distinctly  technological  point  of 
view,  this  truth  would  read  that  transportation  has  fostered 
the  giant  industry  as  over  against  many  small  competing 
units. 

T\Ialthus  in  his  formulation  of  the  law  of  diminishing 
return  for  land  was  very  plainly  proceeding  from  a  purely 
social  and  general  point  of  view,  rather  than  from  the 
point  of  view  of  the  distinct  and  independent  and  com- 
petitive interest.  That  the  law  of  increasing  return,  con- 
ceived as  summing  up  the  optimistic  offsets  in  the  social 
outlook,  is  equally  a  non-competitive  formulation  is  equally 
clear. 

But,  after  all,  what  part,  if  any,  of  all  this  raw  material 
of  optimism  is,  accurately  speaking,  embraced  within  the 
economic  law  of  increasing  return?  So  far,  all  the 
"returns"  suggested  have  sounded  in  terms  of  social  service 
— of  group  or  race  utility,  of  quantum  of  productivity  by 
measure  of  concrete  item  product,  a  purely  weight-and- 
tale  standard  and  basis  of  computation.  And  it  is  unques- 
tionable that,  for  certain  purposes  and  from  certain  points 
of  view,  this  interpretation  of  the  laws  of  return  is  not 
merely  a  possible  one,  but  is  the  sole  interpretation  either 
relevant  or  possible.  But  it  is  equally  beyond  question  that, 
for  certain  other  points  of  view  and  for  certain  other  com- 
putations, measures  of  utility  return  at  the  one  extreme 
and  of  value  return  at  the  other  extreme  are  much  more  to 


488  VALUE  AND  DISTRIBUTION 

the  point.  For  most  purposes  in  the  competitive  reckon- 
ing only  laws  of  value  return  can  have  significance.^ 

But  does  the  law  of  increasing  return,  accurately 
formulated,  have  exclusive  reference  to  such  industrial 
effects  as  are  due  to  the  development  of  the  human  fac- 
tor in  production,  whether  in  physical  efficiency,  in  native 
mental  power,  in  zeal  and  persistency  of  effort,  in  scientific 
knowledge,  in  control  of  technological  methods  and  appli- 
ances, or,  finally,  in  the  advantages  and  methods  of  "team 
play"  as  exhibited  in  higher  forms  of  organization?  That 
is  to  say,  does  the  law  merely  affirm  that  the  better  the  pro- 
ducer the  larger  the  aggregate  social  product,  precisely  as 
in  the  Malthusian  reasoning  it  is  asserted  that  the  less 
adequate  in  quantity  or  quality  the  land  the  smaller  the 
return  to  human  activity  applied  to  the  land? 

But,  so  interpreted,  the  law  of  increasing  return  applies, 
equally  with  the  law  of  diminishing  return,  to  agriculture ; 
and  the  law  of  diminishing  return  applies,  equally  with 
increasing  return,  to  manufacturing.  Agriculture  bene- 
fits by  good  appliances,  by  good  transportation,  and  by 
zeal  and  care  and  intelligence  in  supervision  and  in  organi- 
zation; manufacturing  suffers  by  every  inadequacy  of 
equipment. 

Or  does  the  law  of  increasing  return  assert  that  some- 
how, as  manufacturing  in  the  aggregate  comes  to  employ 
more  men  (or  more  capital?),  it  makes  more  than  pro- 
portionate increase  in  its  weight-and-tale  productivity? 
So  understood — and  irrespective  of  the  effect  of  concentra- 
tion into  larger  and  larger  productive  units — there  is  only 
so  much  in  the  doctrine  as  may  be  implied  through  the 
division  and  specialization  of  employment  between  indus- 
tries ;  and  here  again,  the  principle  applies  unequally  to 
different  manufacturing  industries,  and  while  perhaps 
applying  more  noticeably  to  manufactures  as  a  whole  than 
to  agriculture  as  a  whole,  applies  to  some  branches  of  agri- 
culture in  higher  degree  than  to  some  branches  of  manu- 
facture. 


THE  LAWS  OF  RETURN  489 

Or  does  the  law  in  question  assert  that,  with  organiza- 
tion into  larger  production  units,  there  results  an  increase 
in  the  weight-and-tale  productivity  of  manufacturing 
industries  in  the  aggregate?  Here  again,  the  advocates  of 
la  grande  culture  in  England  or  among  the  bonanza  farm- 
ers of  the  Northwest  would  insist  that  the  law  is  also  in 
degree  an  agricultural  law.* 

Or  is  the  law  to  the  effect  that,  among  competing  units 
of  production,  the  relatively  large  competitor  has  the  rela- 
tively large  weight-and-tale  product? 

Or  does  the  law  run  that  among  competing  producers 
the  relatively  large  units  get  better  results  in  value  product 
in  proportion  to  the  value  outlays  of  production? 

And  if  by  chance  the  law  be  interpreted  in  this  com- 
petitive and  value  sense,  is  it  to  be  taken  to  compare  the 
average  entrepreneur  costs  and  average  value  produc- 
tivity of  different  units  of  production,  or  rather  only  their 
marginal  value  costs  and  their  marginal  value  productivity? 

And  this  leads  us  to  the  question  whether  the  law  is 
framed  as  primarily  of  service  in  the  determination  of 
comparative  profits   and  thereby  as   explaining  the   trend 

*  Carver  makes  the  following  especially  illuminating  observation : 
"Confusion  has  sometimes  resulted  from  a  failure  to  distinguish  the 
law  of  diminishing  return  from  a  somewhat  similar  law  relating  to 
the  comparative  economy  of  large-  and  small-scale  production.  It  is, 
for  example,  sometimes  stated  that  manufacturing  is  carried  on  under 
the  law  of  increasing  return,  because  a  large  factory  can  be  run  more 
economically  and  turn  out  product  at  a  lower  cost,  than  can  a  small 
one.  But  this  is  quite  different  from  saying  that  a  large  factory  can 
be  run  more  economically  than  a  small  one  on  a  given  piece  of  land, 
or  that  it  would  not  be  necessary  to  use  more  land  in  connection  with 

a    large    factory    than   with    a    small    one    of    the    same    kind 

Among  the  various  questions  on  which  the  manager  of  such  a  unit  has 
to  determine  are  the  two  following:  (i)  What  is  the  best  proportion 
in  which  to  combine  the  various  factors ;  (2)  What  is  the  best  size 
for  the  whole  business  unit?  The  law  of  diminishing  return  has  to 
do  with  only  the  former  of  these  questions.  That  is  to  say,  it 
relates  to  the  varying  productivity  of  an  industrial  unit  when  the 
factors  are  combined  in  varying  proportions.  [Concrete  productivity? 
Value  productivity?]  On  the  other  hand  the  law  which  relates  to  the 
comparative  productivity  of  large-  and  small-scale  production  has  to  do 
primarily  with  the  size  of  the  unit." — The  Distribution  of  Wealth, 
pp.  64,  65. 


490  VALUE  AND  DISTRIBUTION 

of  industry  toward  the  giant  organization,  or  rather  as 
explaining  the  bearing  of  giant  organization  upon  market 
prices,  and  as  explaining  also  the  relation  of  these  market 
prices  to  the  productivity  and  the  remunerations  of  the 
various  productive  agents. 

At  any  rate,  the  law  can  hardly  be  one  of  increasing 
proportional  value  productivity  with  increasing  size  of  the 
productive  unit,  unless  the  law  is  taken  to  apply  not  to 
industries  taken  as  a  group  aggregate,  but  to  the  competing 
industries  inside  the  group;  for  it  may  readily  be  true  that 
the  organization  of  any  industry  into  the  giant  form  should 
so  reduce  its  costs  that  even  with  an  expanding  product  by 
weight  and  tale,  the  aggregate  value  of  the  product  should - 
be  a  diminished  one;  and  this  might  hold  of  manufactures 
as  a  whole  as  over  against  agriculture  as  a  whole. 

Nor  can  the  law  rightly  mean  that  greater  value  pro- 
ductiveness goes,  per  unit  of  expense,  with  increasing  size. 
This  is  not  necessarily  true ;  it  is  safe  to  assert  only  that  to 
the  greater  industrial  unit  goes  the  relatively  greater  profit. 
For,  where  the  elasticity  of  consumption  is  not  great,  and 
where  competition  among  rival  businesses  is  close,  lower 
prices  may  obtain  to  an  extent  to  bring  a  lower  value  pro- 
ductiveness for  each,  and  a  generally  lower  average  of 
profits ;  and  yet  it  may  remain  true  that  the  greater  units 
suffer  least,  that  to  the  larger  units  there  accrues  a  relative 
advantage. 

Or  does  the  law  run  only  to  the  effect  that,  in 
industries  of  heavy  investment  and  heavy  fixed  charges, 
the  extra  cost  of  successive  items  of  product  is 
less  than  proportional  to  the  increase  of  product, 
a  law  which,  as  of  necessity,  says  nothing  as  to 
the  aggregate  increase  in  value  going  with  the  increase 
of  product,  but  leaves  it  possible  to  be  assumed  that  the 
entrepreneur  will  limit  his  product  at  the  point  where  the 
extra  expense  of  production,  together  with  the  falling 
prices  upon  the  original  output,  balances  the  extra  value 
represented  in  the  added  items? 


THE  LAWS  OF  RETURN  49 1 

If  this  last  is  the  significance  of  the  law,  a  danger 
signal  is  called  for ;  monopoly  production  would,  it  is  true, 
follow  the  policy  outlined;  but  with  competing  producers 
really  competing,  there  is,  as  trust  promoters  and  trust 
apologists  have  correctly  urged,  and  as  the  influences 
behind  railroad  pooling  fully  illustrate,  no  such  assurance ; 
competition  may  bring  prices  down  nearly  or  quite  to  the 
level  of  the  costs  of  the  extra  product,  practically  canceling 
the  earning  power  of  the  fixed-charge  portion  of  the 
investment.^ 

It  appears,  then,  that  to  find  what  there  really  is  in  this 
law  of  increasing  return  it  is  necessary  rigidly  to  exclude 
all  influences  of  improving  technique,  developing  human 
beings,  and  all  influences  ranking  under  increasing  demand 
for  products,  and  to  confine  ourselves  to  the  sheer  com- 
petitive advantages  of  combination  and  concentration, 
(i)  for  increased  weight-and-tale  product  per  unit  of 
expense,  (2)  for  increased  value  product  per  unit  of 
expense.  Evidently  (i)  may  be  found  without  (2),  though 
(2)  is  impossible  in  the  absence  of  (i). 

Note  that  no  a-priori  reason  exists  why  this  law  of 
increasing  return  might  not  characterize  all  industries.  If 
it  does  not,  or  if  it  does  so  unequally,  the  reason  must  be 
sought  in  the  peculiar  nature  of  the  industries  in  question. 
The  law  may  fail  to  hold  with  certain  industries,  because 
by  the  nature  of  the  instruments  which  they  employ,  or  of 
the  processes  required,  e.  g.,  as  with  land,  the  business  unit 
cannot  greatly  increase,  the  giant  organization  being 
impracticable ;  or  the  market  may  be  of  so  limited  powers 
of  consumption  as  to  render  giant  organization  impossible. 

At  any  rate,  the  law  is  not  one  referring  by  necessity 
to  the  interdependence  of  factors  or  to  the  constitution  of 
the  business  unit  in  respect  to  the  factors  included.  The 
law  might  hold  for  one  industry  almost  exclusively  labor- 
employing,  or  land-employing,  or  machine-employing.  For 

•  Cf.  Marshall,  op.  cit.,  pp.  448,  449. 


492  VALUE  AND  DISTRIBUTION 

the  purposes  of  the  law  more  labor  may  apply  itself  to 
labor  as  well  as  to  land  or  capital ;  or  the  advantage  of 
increasing  size  may  be  obtained  by  adding  more  capital 
goods  to  an  existing  capital  undertaking,  or  by  adding 
more  acres  of  land  to  the  acres  already  employed. 

The  law  of  diminishing  return  is  perhaps  even  more 
difficult  of  making  precise  and  definite.  There  is  the  same 
tendency  to  oscillate  between  value  formulations  or  impli- 
cations and  the  weight-and-tale  type  of  concept.  Malthus, 
as  we  have  seen,  gave  to  the  doctrine  a  distinctly  social 
significance,  and  thereby  of  necessity  a  definitely  weight- 
and-tale  type  of  formulation. 

But  earlier  than  the  time  of  Malthus'  formulation  of 
the  law  in  terms  of  population  and  subsistence,  the  problem 
of  agricultural  returns  had  received  thoughtful  and 
authoritative  consideration,  wherein  the  two  aspects  of  the 
law  so  hopelessly  confused  in  later  discussion  attained 
some  measure  of  vague  differentiation. 

Cantillon,  for  example,  though  regarding  the  prob- 
lem as,  on  the  outlay  side,  one  of  labor  units  of  investment, 
had  yet,  in  prophetic  anticipation  of  Physiocratic  doctrine, 
rendered  over  this  labor  into  terms  of  value  cost  according 
to  the  quantum  of  subsistence  material,  land-productive 
power,  embodied  in  these  units.  It  is,  however,  true  that 
the  significance  of  labor  in  the  case  is  for  the  most  part 
regarded  as  measurable  in  units  of  time. 

But  with  Quesnay  the  talk  is,  on  the  cost  side,  wholly 
of  labor  and  capital  conceived  as  reduced  to  an  entre- 
preneur common  denominator,  and  as  aggregated  under 
the  head  of  "depense,"  a  competitive  formulation  and  a 
value  rendering;  at  the  same  time,  the  return,  the  produit 
net,  is  conceived  as  a  value  surplus  over  the  invested  capital 
outlay. 

Malthus'  doctrine  was  evidently  not  directed  to  the  elu- 
cidation of  the  law  of  rent,  and  was  formulated  in  advance 
of  any  well-considered  and  widely  accepted  doctrine  upon 


THE  LAWS  OF  RETURN  493 

the  land-rent  problem.  Mostly,  perhaps,  because  the  dis- 
cussion was  innocent  of  rental  connotations,  the  formula- 
tion was  consistent  and  free  from  confusion.  But  in  later 
discussion,  and  especially  since  there  has  appeared  to 
exist  a  close  relation  between  diminishing  return  and  the 
rent-cost  issue,  there  has  prevailed  an  almost  uninterrupted 
confusion." 

But  all  of  this  should  become  clearer  after  a  catalogue 
of  the  different  concepts  of  diminishing  returns  has  been 
attempted  and  an  analysis  of  these  concepts  completed. 

I.  Based  upon  the  law  of  satiety  applicable  to  any  stock 
of  consumption  goods   in  the   hands   of  any   single   indi- 

'  Proof  of  this  assertion  is  in  the  nature  of  the  case  almost 
impossible  of  giving ;  some  random  citations  out  of  the  latest  of 
economic    literature    are,    however,    offered : 

"The  law  of  diminishing  returns  is  simply  a  part  of  the  general 
observation  that  the  product  [concrete  product  ?  value  product  ?]  of 
any  given  piece  of  land  does  not  ....  bear  a  constant  ratio  to  the 
amount  of  labor  [time  sum?  pain  sum?  value  sum?]  and  capital  [how 
are  labor  and  capital  aggregated?]  used  in  producing  it." — Carver, 
Distribution,  p.  55. 

"Though  large  applications  of  labor  and  capital  may  continue  to 
produce  larger  crops,  the  crops  will  not  be  as  large  in  proportion  to  the 
labor  and  capital." — Ibid.,  p.  56.  [The  weight-and-tale  aspect  of  the 
crop  is  here  compared  with  labor  somehow  measured,  plus  capital  of 
some  sort  or  other  somehow  reduced   to  homogeneity  with  the  labor.] 

And  on  pages  58,  59,  and  60  of  the  same  work  the  tables  given 
make  comparisons  between  "days'  labor  with  man  and  tools"  and 
bushels  of  product,  and   state  the  results  in  "bushels  per  day's  labor." 

But  on  page  60  the  value  formulation  of  the  law  is  presented : 
"Whenever  you  find  a  competent  farmer  devoting  a  part  of  his  labor 
and  capital  [how  united?]  to  the  growing  of  any  crop  on  more  than 
one  grade  of  land,  you  may  be  sure  that  he  thinks  it  pays  better  to 
do  so  than  to  concentrate  all  his  energies  on  his  best  land." 

However,  later  on  the  same  page  the  discussion  lapses  into  the 
other  concept :  "We  shall  find  by  comparing  the  two  tables,  that  if 
he  had  only  twenty  days'  labor  to  use,  he  could  get  more  bushels  by 
concentrating  them  all  on  his  best  field"   [time  vs.  bushels] . 

"The  law  of  diminishing  returns  relates  to  the  amount  [  ?]  which 
can  be  produced  on  a  given  piece  of  land  [area  ?]  by  varying  amounts 

of  labor  and   capital    [  ?] After  a   certain   point,   the   amount 

that  can  be  produced  on  any  given  piece  of  land  does  not  increase  in 
proportion  to  the  labor  and  capital  used." — Ibid.,  pp.  63,  64. 

Entirely  justifiably  Carver  takes  issue  with  Bullock  (cf.  "The 
Variation  of  Productive  Forces,"  Quarterly  Journal  of  Economics, 
August,  1902),  in  regarding  the  law  of  diminishing  returns  as  applicable 


494 


VALUE  AND  DISTRIBUTION 


vidual,  and  upon  the  derived  concept  of  marginal  utility, 
there  has  been,  as  we  have  already  seen,  somehow  deduced 


not  only  to  land  but  to  all  forms  of  combinations  of  productive  factors  ; 
Carver  says  upon  this  point :  "A  complete  formula  which  should  show 
every  possible  application  of  this  extension  of  the  law  of  diminishing 
returns    would    require    a    separate    term    for   each    and    every    kind    of 

labor,    land,    and    capital The    following    simple    formula    will 

have   to    suffice : 


> 

a 

^1- 

w 

6." 

^M 

a. 

ee: 

If         X  with    Y  will  produce . . 
Then    X  with  aY  will  produce  j 


And    aX  with  aY  will  produce 


more  than  aP 


less     than  aP 


more  than  aP  (increasing  returns) 
less     than  aP  (diminishing  returns) 

(Increasing  economy  of 
large  -  scale  produc- 
tion) 
(Diminishing  economy 
of  large-scale  produc- 
tion) 

"It  is  assumed  that  a  is  a  positive  quantity  greater  than  i" 
(p.  66).  But  a  of  what?  and  I  of  what?  We  seem  to  meet  here 
land  as  superficies,  plus  labor  and  land  somehow  aggregated,  and  the 
whole  set  over  against  weight-and-tale  product.  So  on  pages  90 
and  91 : 

"There  is  another  factor  ....  with  which  we  must  reckon,  and 
to  which  we  may  give  the  name  of  management.  An  industrial  estab- 
lishment is  a  combination  of  various  factors  under  one  management, 
and  the  question  of  large-  or  small-scale  production  becomes,  there- 
fore, a  question  of  the  proportion  between  the  factor  called  manage- 
ment, on  the  one  hand,  and  all  the  other  factors,  on  the  other.  [The] 
formula  ....  which  was  given  as  an  expression  for  the  law  of 
increasing  or  decreasing  economy  of  large-scale  production,  may  be 
modified  as  follows,  to  take  account  of  this  new  factor : 
2  t-i  r  n 


If       M  with    X  with     Y  with    Z  will  produce  P 

(  (Increasing  economy 
more  than  aP  -j  of  large-scale  pro- 
Then  M  with  aX  with  aY  with  aZ   )                              (  duction) 

will  produce ]                               (  (Decreasing     econo- 

less  than  aP      -j  my  of  large-scale 

(  production).  " 

The  following  quotations   illustrate,  within  the  limits  of  the  para- 


THE  LAWS  OF  RETURN  495 

a  law  of  falling  market  price  in  society  for  any  increas- 
ing supply  of  consumption  goods.  The  haziness  of  reason- 
graph  quoted,  a  shift  from  one  point  of  view  to  the  other ;  questions 
of  "pay"  are  vahie  questions,   not   "amount"   questions  : 

"An  increase  in  the  amount  of  labor  on  a  given  amount  of  land 
will  never,  in  any  normal  case,  increase  the  product  as  much  as  the 
labor  is  increased.  That  is  to  say,  except  on  the  frontier,  it  always 
pays  to  cultivate  land  beyond  the  point  where  diminishing  returns 
begin,  if  it  pays  to  cultivate  it  at  all,  but  it  never  pays  to  cultivate  it 
up  to  the  point  where  an  increase  in  the  labor  would  yield  no  increase 
in  the  gross  product"  (p.  73).  "Similarly  ....  an  increase  in  the 
amount  of  land  with  such  given  amount  of  labor  will  always  increase 
the  gross  product.  But  since  so  little  land  is  never  profitably  used  in 
connection  with  a  given  amount  of  labor  as  to  produce  the  maximum 
per  unit  of  land,  it  follows  that,  in  any  normal  case,  an  increase  in  the 
land  with  such  given  amount  of  labor  will  not  increase  the  product  as 
much  as  the  land  is  increased"   (p.  74). 

In  other  cases  the  argument  goes  clearly  over  to  the  value-return 
point  of  view  ;  for  evidently  there  can  be  no  talk  of  substituting  one 
factor  for  another,  or  of  the  proper  proportions  of  the  different  factors 
in  combination,   excepting  upon  the  value-return  basis  : 

"Where  each  factor  costs  something  it  always  pays  to  combine 
them  in  such  proportions  that  if  any  one  or  two  of  them  were  increased 
it  would  increase  the  product,  but  not  so  much  as  the  variable  factor, 

or   factors,    were    increased But   what   is    the    most    profitable 

proportion    in    which    to    combine    the    various    factors    of    production? 

As  already    suggested,   this   depends   upon   their  relative   cost 

There  are,  for  example,  several  ways  to  grow  a  hundred  bushels  of 
corn.  One  is  to  use  much  labor  with  little  land,  making  the  land  pro- 
duce a  heavy  crop,  but  getting  a  small  product  per  unit  of  labor. 
Another  is  to  use  little  labor  with  much  land  but   enabling  the   labor 

to    produce    a    larger    amount    per    unit Where    land    is    dear 

and  labor  cheap,  the   former  is  the  better  method  ;   but  where   land   is 

cheap     and    labor    dear,     the     latter    method     is    better The 

question  which  is  the  better  method  depends  upon  the  relative  cost  of 
the  two  factors"   (pp.    76,   78). 

Seager's  formal  statement  of  the  law  reads  as  one  of  labor  and 
capital  set  over  against  concrete  product :  "After  a  certain  point  has 
been  passed  in  the  cultivation  of  an  acre  of  land  or  the  exploitation 
of  a  mine,  increased  applications  of  labor  and   capital  yield  less  than 

proportionate    returns    in    product Possible    improvement    in 

the  method  of  cultivation  beyond  the  roughest  scratching  over  of  the 
soil  may  and  probably  will  yield  more  than  proportionate  returns  in  the 
wheat  crop,  but  after  a  certain  point  has  been  passed,  all  experience 
confirms  the  law  that  further  improvements  afford  less  than  propor- 
tionate returns." — Introduction,  pp.  114,  115.  But  the  more  accurate 
rendering  is  elsewhere,  but  less  formally,  presented :  "The  final  'doses' 
of  labor  and  capital  he  applies  to  his  land  may  be  just  paid  for  in  the 
price  he  gets  for  the  additional  produce  that  results  from  them.  It  is 
to  his  interest  to  continue  his  cultivation  so  long  as  it  is  remunerative. 
But    all    earlier   applications    of    labor    and    capital    will    be    more    than 


496  VALUE  AND  DISTRIBUTION 

ing  by  which  has  been  achieved  this  affiHation  of  demand 
price  upon  marginal  utiHty,  and  of  faUing  individual 
demand  price  upon  falling  personal  marginal  utility,  and 
of  market  price  upon  some  assumed  social  marginal  utility, 
need  not  here  again  concern  us.  But  the  further  step  by 
which  have  been  worked  out  a  falling  marginal  significance 
and  a  falling  marginal  demand  price  for  increasing  sup- 
'  plies  of  productive  instruments,  requires  especial  attention 
at  this  point. 

The  law  of  falling  price  with  increasing  supplies  of  con- 
sumption goods  holds  in  its  usual  formulation  only  because 
the  demand  schedule  with  any  one  line  of  consumption 
goods  may  be  taken  as  a  fixed  fact;  new  supplies  can  be 

covered  by  the  price  received  for  what  they  added  to  the  product" 
(p.  117). 

Seligman :  "In  the  case  of  agricultural  land  ....  additional 
doses  of  capital  and  labor  will  yield  a  relatively  smaller  produce." — 
Principles,  p.  306.  "Whenever  double  the  amount  of  exertion  yields 
more  than  double  the  amount  of  output,  we  are  in  presence  of  the 
law  of  increasing  returns  or  decreasing  cost.  When  double  the  exer- 
tion just  doubles  the  output,  we  have  the  law  of  constant  returns  or 
constant  cost"   (p.  250). 

Gide  {Principes  d' Economic  Politique,  sixieme  ed.,  p.  132)  states 
in  one  formulation  both  laws,  that  of  produce  return  and  that  of  value 
return,  seemingly  upon  the  assumption  that  they  are  really  one  and 
that  it  does  not  particularly  matter  whether  quantity  of  labor  be 
compared  with  value  of  product  or  quantity  of  product  be  compared 
with  value  of  labor:  "Sans  doute  il  n'est  peut-etre  pas  une  seule  terre 
dont  I'agriculteur  ne  piit,  a  la  rigeur,  accroitre  le  rendement :  seulement, 
passe  un  certain  stage  de  I'industrie  agricole,  il  ne  pent  le  faire  qu'au 
prix  d'un  travail  qui  va  croissant,  en  sorte  qu'il  arrive  un  moment  ou 
I'effort  a  exercer  pour  forcer  le  rendement  serait  hors  de  proportion 
avec  le  resultat.     Soit  un  hectare  de  terre  qui  produit  15  hectolitres  de 

ble Supposons     que     ces     15     hect.     de     ble     representent     100 

journees  de  travail  ou,  si  Ton  prefere  s'exprimer  de  la  sorte,  repre- 
sentent 300  francs  de  frais ;  la  proposition  revient  a  dire  que  pour 
faire  produire  a  cette  terre  deux  fois  plus  de  ble,  soit  30  hect.,  il 
faudra  depenser  plus  de  200  journees  de  travail  ou  plus  de  200  francs 
de  frais.  Pour  doubler  le  produit,  il  faudra  peut-etre  tripler,  peut-etre 
quadrupler,  peut-etre  meme  decupler  le  travail  et  les  frais.  C'est  la 
ce  qu'on  appelle  la  loi  du  rendement  nonproportional  (nonproportionel 
au    travail)." 

Flux's  rendering  of  the  law,  while  ambiguous  for  the  purposes  in 
hand,   may,    it   must  be   admitted,   easily  be   interpreted   into   accuracy : 


THE  LAWS  OF  RETURN  497 

marketed  only  on  terms  of  such  price  as  will  tap  lower 
levels  of  price-paying-  disposition.  If,  however,  the  increase 
is  one  of  a  productive  agent,  there  results  a  new  and  larger 
volume  of  value  product  and  a  rearrangement  of  the  condi- 
tions of  demand ;  the  new  level  of  remuneration  is  to  be 
worked  out  only  as  the  outcome  of  a  new  problem  of  dis- 
tribution, upon  the  assumption  of  a  new  volume  of  value 
product  to  be  imputed  to  a  new  and  a  rearranged  and  read- 
justed set  of  productive  agents.  So,  then,  with  popula- 
tion increasing  relatively  to  the  other  factors,  there  may  be 
expected  a  fall  in  the  level  of  wages,  but  this  only  by  virtue 
of  two  influences,  ( i )  a  less  than  proportional  increase  in 
the  product  to  be  distributed,  (2)  less  favorable  terms  of 
distribution  for  labor  relatively  to  the  other  agents  con- 
cerned in  the  technological  process.     The  rule  and  the  rea- 

"Increase  of  labor  and  capital  devoted  to  the  cultivation  of  a  given 
piece  of  land  will,  at  any  rate  after  a  certain  degree  of  thoroughness 
of  cultivation  is  exceeded,  result  in  increased  product,  indeed,  but  that 
increase  will  be  in  a  constantly  decreasing  proportion  to  the  labor  and 
capital   to   which    it   is   due." — Economic   Principles,   p.   98. 

In  the  main  and  in  general  purport  Fetter's  formulation  sounds 
consistently  as  one  of  value  expenditure  over  against  value  return ; 
as,  e.  g. :  "Economic  diminishing  return  always  has  reference  to 
value.  If  a  particular  kind  and  amount  of  a  certain  material  is  used 
in  varying  combinations  with  other  agents,  the  value  of  the  added 
product  will  not  always  be  in  the  same  proportion  to  the  value  of  the 
added  agent.  The  bridge-builder  must  consider  not  only  what  the 
added  material  will  add  to  strength,  but  what  it  will  cost,  and  whether 
the  result  will  justify  the  expense.  So  the  economic  problem  of 
diminishing  returns  is  more  complicated  than  the  mechanical  one" 
(^Principles,  p.  64).  But  it  is  none  the  less  true  that  the  discussion  is 
always  near  to  the  point  of  dropping  into  utility  calculations  ;  as,  for 
example,  on  page  61  :  "The  phrase  'diminishing\  returns  of  industrial 
agents,'  is  the  expression  of  the  fact  that  there  is  an  elastic  limit  to 
the  utility  any  indirect  good  can  afford  within  a  given  time,"  And 
again  upon  page  71  :  "Diminishing  return  of  indirect  agents  is  a 
special  case  of  the  universal  law  of  the  diminishing  utility  of  goods. 
Diminishing  return  has  to  do  with  indirect  goods,  while  diminishing 
gratification  has  to  do  with  direct  or  consumption  goods.     They  are  two 

species  or  aspects  of  the  same  general  principle Any  indirect 

agent,  added  to  a  fixed  amount  of  other  agents  with  which  it  is  techni- 
cally used,  is  credited  with  a  diminished  utility,  just  as  an  additional 
supply  of  enjoyable  goods  coming  to  meet  a  fixed  demand,  falls  in 
value." 


498  VALUE  AND  DISTRIBUTION 

soning  valid  for  increasing  supplies  of  consumption  goods 
will  not  hold  for  production  goods.' 

II.  The  Malthusian  rendering  of  the  law  of  diminish- 
ing returns  has  no  concern  with  any  principle  of  rising  or 
falling  utility  or  of  rising  or  falling  price,  as  supplies  of 
consumption  goods  may  either  expand  or  contract.  The 
assertion  is  merely  that  successive  increments  of  labor 
applied  to  a  fixed  area  of  land  must  be  remunerated  by  a 
less  than  proportional  increase  in  objective,  concrete, 
material  output: 

This  law  is  purely  a  derivative  from  the  technology  of 
agriculture;  if  economic  at  all,  it  is  only  borrowedly  so; 
it  conceives  labor  roughly  in  terms  of  time,  or,  possibly, 
in  units  of  effort  or  stress  or  pain,  but  certainly  not  in 
terms  of  value  measures  or  of  wage  outlays.  Nor  is  the 
product  thought  of  as  in  an}'  sense  a  value  aggregate ;  nor 
are  possible  distributive  bearings  relevant  to  the  distinctly 
and  exclusively  social  significance  of  the  point  of  view. 
The  tacit  assumptions  are  ( i )  that  land  is  present  in  unchan- 
ging quantities  and  qualities;  (2)  that  labor,  unmodified  in 
quality  but  increasing  in  quantity,  must  apply  itself  to  the 
fixed  land  situation.  The  law  signifies  merely  that  in  agri- 
cultural production  different  productive  factors  are  required ; 
with  sparse  population  some  of  these  factors  are  gratuitously 
present ;  with  denser  population  production  comes  to  depend 
more  and  more  upon  the  non-gratuitous  factors,  that  is, 
upon  labor  directly  or  upon  stored-up  wealth ;  all  of  which 
sums  up  to  mean  that  for  all  social  purposes  crowded  land 
is  synonymous  with  poor  land. 

III.  That  successive  increments  of  labor  and  capital, 
applied  to  a  fixed  area  of  land,  must  be  rezvarded  by  a  less 
than  proportionate  increase  in  weight-and-tale  product: 

''  As  will  later  be  pointed  out  the  prevailing  classification  of 
productive  factors  is  a  most  dubious  one,  even  for  dynamic  problems ; 
and  particularly  is  it  unsafe  to  assume  that  labor  may  be  treated 
in  the  lump  or  aggregate,  without  distinction  of  grades  or  occupations. 
But  for  present  purposes  these  considerations  are,  perhaps,  not 
especially    significant. 


THE  LAWS  OF  RETURN  499 

This  is  a  law  midway  in  transition  from  a  social  and 
material  computation  to  a  competitive  and  value  computa- 
tion. Precisely  how  labor  and  capital  are  to  be  aggregated, 
whether  upon  a  value  basis,  or  upon  the  notion  simply  that 
capital  is  merely  indirect  labor,  and  how,  if  the  value 
aspect  of  the  labor  and  capital  is  accepted,  they  are  con- 
ceived to  be  related  to  the  land  as  mere  area,  and  how  labor 
value  and  capital  value  and  land  value  are  competitively 
relevant  to  weight-and-tale  product,  are  evidently  past  know- 
ing.    The  law  is  one  of  muddled  thinking. 

IV.  That  zvith  an  increasing  money  quantum  of  costs 
upon  a  fixed  area  of  land  goes  a  weight-and-tale  product 
less  than  proportional  to  the  increasing  money  costs: 

This  law  is  manifestly  one  of  more  nearly  completed 
transition  to  a  value  basis.  It  assumes  the  land  area  as 
fixed  and,  together  with  this,  a  fixed  entrepreneur  activity 
of  supervision;  and  it  conceives  the  application  of  pro- 
ductive energies  in  terms  of  value  outlay ;  and  it  abandons 
any  distinction,  for  its  purpose,  between  capital  outlays  for 
labor,  and  capital  outlays  for  instrumental  goods ;  but  it  is 
not  at  all  clear  that  either  the  fixed  land  area  or  the  fixed 
entrepreneur  activity  has  been  carried  over  into  a  value 
rendering ;  the  product  remains  a  non-value  fact,  though  it 
would  be  an  easy  step  to  carry  this  over  into  the  value 
denominator,  by  assuming  that  the  same  price  level  holds 
for  the  new  product  as  for  the  old.® 

V.  That  upon  a  fixed  area  of  land,  an  increasing 
expense  outlay,  iL'ith  fixed  entrepreneur  activity  of  super- 

*  In  this  general  field  of  analysis,  by  far  the  best  work  known  to 
the  present  writer  is  that  of  Professor  Commons  in  his  Distribution  of 
Wealth  (Macmillan,  1893).  The  following  passages  especially  deserve 
citation  in  this  connection: 

"The  land-owner  does  not  produce  goods  for  his  own  consumption, 
but  for  sale.     Hence  his  land  is  valuable  to  him  in  proportion  to  the 

exchange    value    of   the    product A    given    area    of   land    does 

not  usually  afford  room  for  the  production  of  so  large  a  supply  of 
gioods  as  to  affect  the  general  supply  of  those  goods.  The  prices  of 
products  are  determined  by  the  general  forces  of  society,  operating 
throughout  the  world So  far,  then,  as  the  given  area  is  con- 
cerned, the  price  per  unit  of  its  product  changes  so  little  that  we  may 


500  VALUE  AND  DISTRIBUTION 

vision,  is  not  remunerated  with  a  proportional  increase  of 
value  product: 

Here  the  adoption  of  value  outlay  as  over  against  value 
product  is  approximately  complete;  nevertheless,  the  land 
fact  and  the  supervision  fact  are  not  fully  assimilated  to 
the  value  reckoning.  Capital  is  conceived  as  invested 
indifferently  in  labor  or  in  instrument  hire,  but  not  in  land 
hire;  that  is,  the  constitution  of  the  production  complex 
is  labor  value+capital  value-f-land  area-j-entrepreneur  ac- 
tivity ;  these,  as  combined  in  the  productive  process,  give 
somehow  a  value  product. 

VI.  That  with  a  fixed  investment  in  land,  on  entrepre- 
neur cannot,  with  successive  increments  of  capital  outlay, 
obtain  increases  of  product  proportional  in  value  to  the 
increase  in  capital  expense: 

Here  all  factors  in  the  production  complex,  with  the 
exception  of  entrepreneur  activity  of  supervision,  are 
reduced  to  the  capital-value  denominator.  But  both  land 
value  and  entrepreneur  activity  are  conceived  as  constants. 

VH.  That  zvith  fixed  and  valued  investment  in  land, 
and  with  fixed  and  valued  entrepreneur  activity  in  pro- 
duction, successive  additions  of  expense  for  labor  or  for 
instrumental  goods  or  for  both  are  remunerated  by  less 
than  proportional  additions  to  the  value  product: 

regard  it  as  fixed  and  constant.  The  total  value  of  its  product  varies, 
therefore,  exactly  in  proportion  to  the  quantity  of  the  product,  and  as 
this  is  subject  to  the  law  of  diminishing  returns,  so  also  must  be  its 
value"   (p.  138). 

"The  reason  why  average  returns  are  not  as  high  ....  is 
because  successive  increments  yield  a  less  return  than  would  the  single 
increment  if  it  were  the  only  one  invested.  In  other  words,  the  concep- 
tion of  diminishing  returns  has  reference  to  a  possible  set  of  circum- 
stances    showing    what    would     occur    under    other    conditions,     when 

investments  might  be  increased  or  diminished Where   twenty 

laborers  are  employed  with  an  aggregate  product  of  3,200  bushels,  and 
an  average  product  of  160  bushels,  if  we  should  ascribe  to  the  first  ten 
laborers  a  product  of  200  bushels  each,  to  the  next  two,  a  product  of 
140  bushels  each,  and  to  the  last  five,  100  bushels  each  ....  this  is 
not  the  actual  product  of  the  different  laborers,  since  they  all  possess 
equal  efficiency  ;  but  from  an  analogy  with  what  they  zuoiild  produce 
under  the  different  conditions  ....  we  are  justified  in  dividing  up 
the  aggregate  product  in  this  manner"   (pp.    152,   153). 


THE  LAWS  OF  RETURN  5°! 

Subjected  to  reinterpretation,  this  appears  to  mean  no 
more  than  if  vaUie-wise  you  double  only  a  part  of  your 
outlays  of  production,  you  will  fall  more  or  less  short  of 
doubling  the  value  output,  a  proposition  not  seriously 
questionable  as  doctrine  and  not  especially  fertile  of  new 
truth.  There  is  also  to  be  noted,  in  passing,  the  assumption 
made — an  assumption  common  to  practically  all  discussion 
in  this  connection — that  the  costs  imposed  upon  entrepre- 
neur capital  in  the  productive  process  are  actually  and 
necessarily  restricted  to  four  directions  of  expenditure, 
land  hire,  capital  hire,  labor  hire,  and  supervision  charge. 

VIII.  A  law  of  rising  costs  of  production  generally  and 
of  rising  market  prices  for  land  products,  with  increasing 
population: 

It  is  assumed  that  with  increasing  population  there 
must  go  an  increasing  land  scarcity ;  and  it  is  assumed, 
in  addition,  that,  because  of  the  relatively  inelastic  quality 
of  this  increased  consumption  need,  production  must  take 
place  at  a  high  level  of  entrepreneur  cost,  and  that  this 
production  will  cease  only  at  the  point  where  the  neces- 
sary cost  outweighs  the  possible  price ;  and  that  in  the 
process  of  adjusting  and  distributing  the  outlays,  the 
increased  selling-price  of  the  product  will  mostly  go  for  the 
services  of  these  necessary  agents  which,  relatively  to  the 
increasing  demand,  are  assumed  to  have  become  relatively 
scarce,  e.  g.,  the  land. 

That  is  to  say,  this  formulation  of  the  law  conceives  of 
all  entrepreneur  debits  against  production  as  equally  costs 
of  production  under  the  value  measure;  in  other  words,  it 
reduces  land  hires  and  all  other  hires,  together  with  the 
entrepreneur's  own  necessary  remuneration,  to  the  value 
statement  as  supply-limiting  resistances  offered  to  entre- 
preneur activity  as  applied  to  this  particular  line  of  produc- 
tion. 

But  this  formulation,  while  not  open  to  attack  for  inaccu- 
racy or  for  lack  of  business  actuality,  is  evidently  a  formu- 
lation which  assumes,  as  fundamental  to  the  entrepreneur 


502  VALUE  AND  DISTRIBUTION 

computation,  an  existing  system  of  value  costs,  and,  among 
other  things,  assumes  such  action  of  distributive  forces  as 
have  attributed  a  high  rent,  a  value  hire,  to  the  better 
qualities  of  land,  and  this  by  very  virtue  of  the  fact  that 
these  better  qualities  of  land  excuse  the  producer  from 
high  alternative  expenses  for  other  productive  agents. 
That  is  to  say,  this  law  reports  the  results  of  an  economic 
analysis  instead  of  contributing  to  such  an  analysis;  it  is 
a  law  summarizing  distributive  results  rather  than  a  law  of 
production  making  toward  an  ultimate  solution  of  the  value 
problem ;  in  last  analysis,  it  is  a  law  of  value  determination 
only  in  so  far  as  it  points  to  the  underlying  and  funda- 
mental conditions  determinative  of  entrepreneur  activity, 
entrepreneur  costs,  and  entrepreneur  value  adjustments. 
The  relative  scarcity  of  those  agents  requisite  for  certain 
products  is  the  ultimate  explanation — on  the  cost  side — for 
the  relatively  high  exchange  position  of  those  products. 
These  high  values  are,  in  point  of  process,  reached  and 
adjusted  as  the  outcome  of  the  entrepreneur  system  of 
production;  in  the  course  of  the  process,  as  means  to  the 
result,  and  as  motived  by  the  result,  there  come  to  be 
imputed  to  the  scarce  agents,  under  entrepreneur  bidding, 
their  high  rental  and  sale  values. 

IX.  That  with  increasing  population  there  go  in  agri- 
culture increasingly  large  value  outlays  by  the  entrepre- 
neur, relatively  to  the  value  product: 

But  if  this  is  true,  it  must  be  true  only  as  based  upon 
some  distributive  analysis  not  contained  in  the  law  and  not 
in  terms  appealed  to  by  the  law.  On  the  face  of  it,  there 
appears  to  be  no  reason  why,  with  increasing  population, 
agriculture  should  become  less  profitable  to  the  entrepre- 
neur cultivator.  If  his  costs,  rent  and  other,  become  in  the 
^g'g'i'eg'ate  higher,  so  might  also  the  value  of  his  products  be 
higher :  or  his  wage  outlays  might  be  lower,  though  this 
again,  if  true,  must  deduce  its  warrant  from  some  source 
outside  the  law, — by  appeal,  perhaps,  to  the  same  distribu- 
tive analysis  as  that  upon  which  the  law  itself  is  based. 


THE  LAWS  OF  RETURN  5^3 

Why,  indeed,  must  rent  be  higher,  or,  if  higher,  the  other 
distributive  shares  also  lower  ?  The  law — valid  doubtless — is 
distributive  in  tenor;  land  receives  its  larger  ratio  of  the 
value  product,  but  this  depends  as  much  upon  the  peculiari- 
ties of  the  demand  for  the  product  as  upon  the  technological 
conditions  of  its  production.  With  some  commodities, 
indeed,  increasing  difficulty  in  production  cancels  all 
the  value  of  the  agent.  That  there  could  be  no  land 
scarcity  but  for  the  limited  productive  powers  of  any 
limited  area  of  land ;  that  is,  that  high  rents  could  not  exist 
in  the  absence  of  the  technological  fact  of  the  diminishing 
responsiveness  of  land,  leaves  it,  in  the  absence  of  other 
conditions,  still  possible  that  rent  should  fall  with  the 
diminishing  weight-and-tale  return.  This  form  of  the  law 
of  diminishing  return  is,  then,  not  so  much  a  law  illumi- 
nating other  problems  as  deriving  illumination  from  other 
solutions ;  and  all  laws  either  of  diminishing  or  of  increas- 
ing value  return  are  necessarily  of  this  sort. 

X.  That  with  increasing  population  there  goes  in  agri- 
culture an  increasing  entrepreneur  value  outlay  relatively 
to  weight-and-tale  product: 

A  useless  formulation  excepting  as  working  out  to  the 
purport  of  law  VIII,  viz.,  that  the  product  being,  rela- 
tively to  costs,  smaller  in  value,  the  price  per  unit  must  be 
higher. 

XI.  That  zvith  increasing  population  there  goes  a  higher 
rental  and  exchange  value  for  land: 

The  same  assumption  of  progressive  land  scarcity  is 
made  here  as  in  VIII ;  the  law  is,  indeed,  in  some  respects 
practically  a  restatement  of  VIII,  but  with  some  difference 
in  emphasis.  Underlying  either  law  is  the  assumption  that 
the  food  demand  increases  in  approximate  proportion  to 
the  increase  in  population,  that  despite  the  fact  that  labor 
and  capital  are  contributory  factors,  their  relation  to  land 
is  rather  complementary  than  substitutional,  and  that  thereby 
the  emphasis  of  demand  falls  upon  land  as  productive 
instrument. 


504  VALUE  AND  DISTRIBUTION 

And  it  is  to  be  noted  that,  together  with  increasing 
population,  there  is  taken  to  go  without  saying  an  increased 
supply  of  labor  effectiveness,  and,  almost  without  saying, 
an  increased  aggregate  of  instrumental  goods — techno- 
logical capital.  But,  in  fact,  were  the  average  quality  of 
labor  so  much  deteriorated  as  to  amount  in  the  aggregate  to 
no  increase  in  labor  power  and  as  to  permit  no  increase  of 
instrumental  goods,  it  would  still  be  true,  the  food  require- 
ment being  taken  as  increasing  with  the  numerical  increase 
in  population,  that  the  emphasis  of  demand  would  rest 
upon  land.  All  lines  of  product  would  suffer  in  output, 
but  non-food  lines  more  markedly  than  food  lines,  and  this 
primarily  because  of  so  high  a  value  upon  food  as  to  dis- 
place, in  some  measure,  other  lines  of  production,  to  widen 
the  land-value  differentials  above  the  marginal  powers,  and 
to  give  high  rental  values  to  the  land. 

But,  if  so,  there  must  be  behind  all  this  the  tacit  condi- 
tion or  assumption  that  the  demand  for  agricultural  products 
traces  back  to  an  especially  inelastic  quality  of  consumption. 
If  with  a  doubled  population,  land  powers  being 
assumed  to  be  fixed,  there  went  no  increase  of  labor  power 
or  of  capital  power,  there  could  be  no  increase  of  land 
emphasis,  if  only  it  were  as  easy  to  cut  down  food  con- 
sumption as  other  consumption. 

But  still  more  important,  because  more  actual,  is  the 
possibility  that  with  the  increase  in  population  should  go 
a  more  than  proportional  increase  in  the  per-capita  effi- 
ciency of  men  as  wealth-producers:  what  then?  The  pres- 
ent rendering  of  the  law  appears  to  say  that,  with  the 
factors  of  production  other  than  land  outstripping  land  in 
rate  of  increase,  those  products  markedly  of  land  origin 
will  rise  in  value,  and  that  therewith  will  also  rise  the  rent 
and  the  value  of  the  unit  area  of  land. 

But  inasmuch  as  land  is  not  the  only  productive  factor 
in  agriculture,  it  must  be  recognized  that  the  demand  for 
agricultural  products  is  at  the  same  time  a  demand  for 
non-land  instruments  of  production,  that  is  to  say,  a  demand 


THE  LAWS  OF  RETURN  5^5 

for  labor  and  capital.  Therefore,  were  it  true  that  labor 
and  capital  were  in  the  main  substitutionary  rather  than 
complementary  in  their  technological  relations  to  land  in 
agricultural  production,  there  could  be  no  such  redistri- 
bution of  production-distribution  advantages  as  is  implied 
in  the  law  as  formulated.  Thus,  also,  if  it  were  true  of 
land  that  it  could  take  the  place  of  labor  and  capital  in  any 
large  share  of  their  uses,  rather  than  serving  as  co-operat- 
ing complementary  productive  instrument  with  them,  land 
could  never  have  experienced  the  fall  in  rents  and  in 
market  price  characteristic  of  the  past  half-century. 

It  follows  that,  under  the  assumed  conditions  of  increas- 
ing population,  of  only  proportionately  increasing  food 
requirement,  and  of  more  than  proportionately  increasing 
labor  effectiveness  and  capital  expansion,  there  is  no  basis 
of  foretelling  the  effect  upon  land  rents  and  land  values 
otherwise  than  accordingly  as  assumptions  are  made  as  to 
the  direction  of  human  development.  Improvements  in 
transportation  or  in  the  technique  of  production  may  be  so 
great  in  the  direction  of  agriculture  as  to  make  even  the 
best  grades  of  land  free  land,  and  thus  to  cancel  the  impor- 
tance of  rent  in  the  computation  of  costs,  and  to  leave  the 
food  supply  to  find  its  relative  cost  purely  in  the  relative 
outlays  for  labor  and  for  non-land  instrumental  goods. 

But  in  the  degree  that  the  actual  inelasticity  of  the  con- 
sumption of  agricultural  products — not  all  are  food  prod- 
ucts— is  overstated  in  the  assumption,  and  in  the  degree 
that  the  development  of  human  productive  powers  may 
not  take  place  in  food-product  directions,  must  this  solu- 
tion undergo  modification.  On  the  other  hand,  a  gain  in 
land  rent  must  follow  upon  an  increase  of  non-substitu- 
tionary  supplies  of  labor;  but  whether  this  would  be 
accompanied  with  any  marked  rise  in  the  prices  of  food 
products  would  depend  greatly  upon  the  character  of  the 
increase  in  the  supply  of  labor,  whether,  for  example,  and 
in  what  degree,  it  were  adapted  to  other  than  agricultural 
production. 


5o6  VALUE  AND  DISTRIBUTION 

If  these  solutions  shall  appear  to  be  disappointingly 
vague  and  conjectural,  the  explanation  must  be  sought  in 
the  nature  of  the  problem  and  of  the  assumptions  neces- 
sarily attendant. 

The  foregoing  analysis  of  the  various  different  con- 
cepts of  diminishing  return — and  there  are  possibly  still 
others  waiting  to  be  catalogued — should  have  sufficed  to 
make  it  clear  that  such  formulations  of  the  law  as  promise 
significance  or  serviceability  for  economic  purposes  of  any 
sort,  competitive  or  collective,  are  three  in  number: 

1.  A  dynamic  and  sociological  generalization  foretell- 
ing a  diminution  in  the  per-capita  command  of  consum- 
able goods,  by  reason  solely  of  the  society  coming  to 
contain  more  members,  these  being  assumed  to  be  substan- 
tially unmodified  in  all  relevant  aspects. 

2.  A  law  in  the  dynamics  of  competitive  economics ;  a 
forecast  of  changes  in  the  relative  distributive  shares 
accruing  to  the  different  agents  and  instruments  in  produc- 
tion technologically  viewed,  changes  due  solely  to  changes 
in  the  relative  supply  of  these  concrete  factors ;  thereby, 
changes  in  their  relative  value  through  the  capitalization  of 
their  income-earning  power ;  and  thereby,  also,  upon  the 
supply  side  (and  for  whatever  the  cost  of  production  com- 
putation may  be  worth),  and  solely  by  reason  of  these 
distributive  shares  functioning  as  costs  in  competitive  entre- 
preneur production,  a  forecast  of  the  relative  changes  in 
the  market  prices  of  the  various  sorts  of  commodities 
technologically  dependent  in  various  degrees  upon  the  use 
of  these  differently  remunerated  productive  facts. 

3.  A  static,  competitive,  entrepreneur  law  expressing 
the  disadvantages  accruing  to  the  entrepreneur  from  any 
relative  excess  or  defect  in  the  quantities  employed  of  any 
productive  agent  or  agents,  in  view  of  the  existing  levels 
of  compensation  for  these  dift'erent  agents — a  law  formu- 
lating the  disadvantage  from  the  unskilful  combination  of 
cost  goods. 


THE  LAWS  OF  RETURN  5°? 

It  is  to  be  noted  with  regard  to  Law  (i),  the  popula- 
tion-food law,  that  the  reasoning  upon  which  it  is  formu- 
lated abstracts  entirely  from  the  possibility  that  human 
development  may — at  least  in  some  measure — avail  to 
enlarge  the  land  supply,  from  the  possibility  also  that  agri- 
cultural technique  and  transportation  effectiveness  may 
appreciably  modify  the  situation,  and  finally  from  the  pos- 
sibility that  the  sources  of  food  supply  may  not  remain 
essentially  agricultural,  and  that  the  food  requirement  may 
not  increase  precisely  in  the  ratio  that  the  labor  supply 
increases.  That,  upon  the  assumptions  made,  the  social 
product,  food  and  other  goods  together,  must  be  unfavor- 
ably affected  seems  to  be  a  ready  and  necessary  inference 
from  the  general  principle  that  if  some,  but  not  all,  of 
the  productive  factors  are  doubled,  the  weight-and-tale 
product  will  not  fully  double. 

Law  (3)  carries  over  into  the  competitive  field  this 
principle  that  a  shortage  in  any  one  factor  of  production 
affects  the  product  unfavorably ;  those  factors  increasing 
least  rapidly,  or  not  at  all,  take  on  relatively  a  more  or 
less  pronounced  scarcity,  and  thereby  acquire  scarcity 
values  as  compared  with  the  increasing  factors,  the  degree 
of  the  scarcity  depending  upon  the  degree  of  technological 
monopoly  held  by  the  factor  in  question,  that  is,  upon  the 
substitutions  and  upon  the  terms  of  the  substitutions  pos- 
sible in  the  case, — a  changing  problem  with  every  change 
in  the  direction  of  human  efficiency  in  the  technique  of 
production. 

With  every  change  in  the  per-capita  productiveness  of 
society,  human  needs  and  desires  being  assumed  as  a  con- 
stant, there  goes,  of  course,  a  fall  in  the.  average  signifi- 
cance of  new  increments  of  product,  a  law  of  diminishing 
utility  return  per  item  of  weight-and-tale  product.  But 
while  this  law  is  consistent  with  an  expanding  weight- 
and-tale  productivity — depends  indeed,  upon  it — the  law  is 
not  inconsistent  with  unchanging  conditions  of  value  produc- 
tivity.    For  value  productivity  is  distributive  in  reference — 


5o8  VALUE  AND  DISTRIBUTION 

has  to  do,  that  is,  with  the  different  factors  con- 
sidered as  share-takers  in  the  division  of  product,  and  with 
the  relation  of  the  different  shares  to  one  another.  Being 
a  question  of  vakie,  of  exchange  relations,  it  becomes  a 
question  of  the  relative  shares  in  the  total  output  of  value 
product.  Thus  if  all  factors  in  production  were  increasing 
with  equal  relative  rapidity,  two  yards  of  cloth,  two  pairs 
of  shoes,  and  two  bushels  of  wheat  being  produced  where 
before  the  product  was  only  one  of  each,  there  is  no 
necessary  reason  why  there  should  be  either  increasing  or 
decreasing  value  productivity  for  any  factor  in  production. 
If,  then,  there  is  occasion  to  forecast  diminishing  returns 
for  any  factor,  it  seemingly  must  be  by  reason  of  some 
relative  inelasticity  of  supply  supposed  to  attach  to  some 
other  factor  or  factors  in  production.  It  looks,  then,  as  if 
the  peculiar  conditions  surrounding  the  land  supply  must 
furnish  the  only  serious  basis  and  occasion  for  all  dimin- 
ishing-return  discussion,  so  far  as  it  is  something  more 
than  an  entrepreneur  law  of  disadvantage  from  a  badly 
constructed  production  complex.® 

But  upon  what  assumption  could  there  really  take  place 

°  It  is  of  course  unfortunate  that  the  established  terminology 
should  speak  of  this  principle  as  "diminishing  returns  for  land  ;"  where 
there  are  diminishing  returns  of  any  sort,  these  are  not  for  the  land 
but  for  the  factors  co-operating  with  the  land.  But  purely  as  a  pro- 
duction process,  the  returns  are  neither  separately  for  the  land  nor  for 
the  other  factors,  but  only  for  the  factors  in  the  aggregate,  as  a  pro- 
duction complex.  When  a  separation  is  made  so  that  the  talk  may  be 
either  of  the  absolute  or  of  the  relative  shares,  the  discussion  has 
passed  over  from  the  field  of  technological  production  to  the  field  of 
value  distribution, — is  no  longer,  that  is  to  say,  a  matter  of  causes  from 
the  point  of  view  of  production,  but  of  results  from  the  point  of  view 
of  distribution, — not  a  question  of  quantum  or  of  relative  share  pro- 
duced by  any  separate  factor,  but  of  the  value  result  attributed  or 
imputed  to  that  factor.  And,  as  distributive  result,  the  fact  may  be 
that,  despite  a  diminishing  return  to  the  aggregate  complex,  there  may 
be  an  increasing  return,  both  relative  and  absolute,  to  some  among  the 
factors.  As  a  distributive  doctrine,  then,  the  terminology  should 
rather  speak  of  diminishing  returns  to  the  non-land  factors  ;  while  as  a 
production  doctrine,  no  question  of  the  separate  shares  of  the  factors 
should  arise  ;  the  talk  should  be  of  diminishing  returns  in  agriculture, 
or  ot  diminishing  returns  in  landed  production,  but  not  of  diminishing 
returns  to  the  land. 


THE  LAWS  OF  RETURN  5^9 

this  equal  proportional  expansion  in  all  productive  factors, 
in  such  sort  as  to  leave  the  value  resultant  one  of  unmodi- 
fied exchange  ratios  and  the  distributive  outcome  one  of 
unchanged  proportionate  shares?  Only  upon  the  assump- 
tion that  the  increase  in  the  supply  of  each  factor  of  pro- 
duction has  been  accompanied  by  a  proportionate  increase 
in  the  demand  for  the  various  commodities  especially 
dependent  technologically  upon  the  respective  factors.  But 
increase  in  labor  supply,  if  it  comes  by  increase  in  number 
of  human  beings,  rather  than  by  expanding  individual 
efficiency,  is  certain  to  do  at  least  one  thing,  viz.,  to  bring 
with  it  an  approximately  proportional  increase  in  the  food 
requirement;  and  precisely  the  contrary  will  be  the  fact,  if 
the  increase  of  labor  power  accrues  through  higher  per- 
capita  powers  of  production. 

And  precisely  as  the  food  requirement  is  the  most 
inelastic  of  needs  in  face  of  shortage,  so  it  is  least  expan- 
sive in  the  event  of  expanding  supplies.  It  follows  that 
what  appears  upon  its  face  to  be  a  prospect  of  constant 
value  return  may  turn  out  to  be  one  either  of  falling  or  of 
rising  distributive  advantage  for  land.  And  as  we  have 
already  seen,  this  is  further  complicated  by  considerations 
relating  to  the  direction  in  which  technological  develop- 
ment may  take  place. 

Our  third  law  of  return,  the  static  law  of  the  proper 
proportions  for  the  productive  factors  in  the  entrepreneur 
complex,  is  obviously  the  only  one  of  the  three  laws  having 
significance  for  the  cost  problem  of  any  particular  entre- 
preneur at  any  particular  time.  Law  (2)  is  a  forecast  of 
probable  changes  in  the  conditions  under  which  the  cost- 
value  problem  must  come  to  be  worked  out.  That  the  hire 
of  any  particular  factor  will  be — or  may  be — greater  or 
less  than  it  now  is,  does  not  make  greater  or  less  the  pres- 
ent hire,  and  does  not  modify  the  present  relation  of  the 
present  hire  to  present  cost  and  present  value.    It  is  unneces- 


5IO  VALUE  AND  DISTRIBUTION 

sary  to  look  ahead  fifty  years  in  order,  by  finding  what  the 
costs  will  be  then,  to  know  what  the  costs  are  now. 

It  must  now  be  noted  that,  simply  because  this  law  of  bad 
proportions  between  productive  factors  is  an  entrepreneur 
law,  it  must,  in  any  accurate  formulation,  take  into  account 
the  entrepreneur  himself  as  a  productive  fact.  As  entre- 
preneur, he  is  a  fixed  quantity,  and  at  some  point  or  other 
the  law  of  (disadvantageous  combination,  of  diminishing 
value  return,  must  apply  to  any  further  increases  in  the 
magnitude  of  his  operations,  and  must  set  a  limit  to  the 
application  of  the  law  of  increasing  returns  with  the 
greater  size  of  the  production  complex. 

It  remains  once  more  to  call  attention  to  the  danger- 
ously technological  tenor  of  all  this  diminishing-return  dis- 
cussion. For  purposes  of  retrospect  or  of  prophecy,  and  in 
the  field  of  value  distribution  no  less  than  in  the  field  of 
social  welfare,  there  are  meaning  and  interest  attaching  to 
the  broaidly  admitted  threefold  classification  of  productive 
factors.  But  it  is  equally  clear  that  the  classification  is 
inaccurate  and  unworkable  for  close  theoretical  purposes ; 
that  the  technological  relations  between  the  different  pro- 
duction goods  are  in  a  state  of  constant  flux ;  that  the  sub- 
stitutionary relation  is  everywhere  found  in  a  measure,  and 
is  almost  as  likely  to  obtain  between  classes  of  factors  as 
within  any  one  class,  while  the  complementary  relation  is 
not  appreciably  rarer  within  a  class  than  between  classes ; 
that  the  determination  in  any  specific  case  of  what  share  is 
land  instrument  and  what  share  non-land  is  impracticable 
or  impossible;  and  finally  and  chiefly,  that  in  competitive 
production  no  one  is  concerned  in  any  way  either  with  the 
validity  of  the  classification  or  with  the  accuracy  of  its 
application. 

For,  from  the  point  of  view  of  the  individual,  all  ques- 
tions of  cost  are  questions  of  value  expense,  and  capital  is 
merely  the  fund  out  of  which  the  costs  are  advanced  and 


THE  LAWS  OF  RETURN  511 

into  which  the  instrumental  charges  and  all  other  produc- 
tion expenses  are  reduced.  Thus  while,  if  one  likes,  he 
may  distribute  this  capital  expense  among  its  different 
technological  and  other  items,  including  much  that  cannot 
be  classified  as  either  land,  labor,  or  capital,  it  will  remain 
true  that  the  outlay  for  labor  hire  is  a  capital  outlay,  the 
outlay  for  capital  goods  likewise  a  capital  outlay,  the  outlay 
for  land  also  equally  a  capital  outlay /and  therefore  that  the 
law  of  diminishing  return  is,  for  competitive  purposes,  a 
law  of  diminishing"  return  upon  capital  and  not  upon  land 
or  instruments  or  labor!]  And  to  show  that  this  falling 
return  upon  capital  is  or  is  not  due  to  unfortunate  com- 
binations of  technological  items  indefinite  in  variety  and 
susceptible  of  indefinite  classification  and  subclassification, 
tripartite  or  other,  would  leave  it  still  true  that,  for  all 
competitive  purposes,  the  only  falling  return  having  sig- 
nificance or  interest  must  be  the  falling  return  upon  value 
cost,  expressed  under  the  private-capital  denominator.  But 
all  this  will  become  clearer,  as  approached  from  a  slightly 
different  point  of  view,  in  the  next  chapter. 


CHAPTER  XXIV 
THE  DYNAMICS  OF  VALUE  AND  OF  DISTRIBUTION 

As  has  already  been  sufficiently  shown,  the  long-time 
computation  of  costs,  the  dynamic  aspect  of  economic 
theory,  points  not  to  a  new  value  theory  or  even  to  a 
supplementary  value  theory,  but  simply  to  the  tendencies 
and  influences  making  for  change  in  the  fundamental  con- 
ditions under  which  the  value  problem  must  later  be. worked 
out,  the  costs  fixed,  and  the  production  distribution  reached. 

These  changes  in  fundamental  conditions  are  evidently 
restricted  to  two  sorts,  (i)  changes  in  the  demands  for 
consumption  goods,  and  (2)  changes  in  the  supplies  or  in 
the  ownership  of  the  productive  agents,  instruments,  rights, 
and  opportunities. 

That  either  of  these  two  lines  of  influence  may  affect 
the  remunerations  of  productive  factors,  and  thereby  their 
values,  is  readily  seen ;  that  changes  in  the  demand  for 
products  should  have  the  same  result  carries  its  own  war- 
rant in  the  very  statement ;  so,  also,  that  changes  in  the 
supply  of  any  factor  of  production  must  affect  the  remunera- 
tion of  it  commends  itself  as  obvious — looks,  indeed,  much 
simpler  and  clearer  than  it  really  is.  But  that  changes  in 
the  supply  of  some  factors  have  of  necessity  direct  and 
important  bearing  upon  the  remunerations  of  other  factors 
is  a  long  distance  away  from  self-approving. 

It  is  nevertheless  true : 

A  demand  for  means  of  production  arises  only  when,  on  the 
one  hand,  wc  are  obliged  to  employ  them  or  else  go  without  what 
they  produce;  and  when,  on  the  other  hand,  we  can  employ  them, 
inasmuch  as  we  have  at  our  disposal  the  necessary  complimentary 

goods It  follows  ....  that  the_effective  demand  for  means 

of  production  must  vary,  not  only  wherL_there  is  a  variatLonia  per- 
sonal wants,  but  also  when  tTiere  is  a  variation  in  the  quantity  of 
complementary  goods.* 

*  Wieser,  Natural  Value,  p.    102. 

512 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        513 

I  The  demand  for  plows  is  truly  derivative  from  the 
demand  for  foods,  but  not  directly ;  in  any  event,  it  is 
equally  to  be  said  that  the  supply  of  land  furnishes  the 
demand  for  plows ;  lumber  affords  a  demand  for  nails, 
horses  for  wagons,  wagons  for  horses,  plows  for  land,  men 
for  plows,  plows  for  men,  horses  for  stables,  stables  and 
horses  for  carpenters  and  for  stable  boys,  horses  and 
wagons  for  harnesses  and  for  drivers,  etc. 

It  is  true  that  not  rarely  the  possibility  of  substitution 
exists  between  different  orders  or  varieties  of  productive 
agents, — that  one  sort  takes  the  place  of  another,  supplies 
the  demand  for  it,  rather  than  furnishes  a  demand  for  it. 
But  more  commonly  it  is  through  the  principle  of  comple- 
mentarity  rather  than  of  substitution  tliat  most  of  the 
d3'namic  forces  in  economics  exert  their  influence  upon  sup- 
glies  of  products,  upon  entrepreneur  bidding,  upon  costs 
and  distributive  shares,  and  upon  the  exchange  relations  of 
goods,  as  it  is  likewise  under  this  same  principle  of  com- 
plementarity diat  various  perplexing  theoretical  problems 
both  in  static-value  imputation  and  in  dynamic-value  impu- 
tation are  presented.  New  combinations  of  productive 
factors  entail  what  new  value  results  and  what  new  dis- 
tributive outcomes? 

V^The  usual  treatment  of  the  problem,  as  one  centering 
about  questions  of  multiplying  human  beings  as  over  against 
a  geographically  limited  land  supply,  emphasizes  what  is, 
for  economic  prophecy,  the  most  important  and  interesting 
phase  of  this  investigation ;  for  it  is  again  to  be  emphasized 
that  only  in  the  expectation  that  some  factor  or  factors  of 
production  will  come  to  be  relatively  scarce  is  there  any- 
thing to  be  discussed^  The  laws  of  increasing  return  are 
laws  of  change  in  one  aspect  of  human  productive  ability 
and  adaptability;  the  laws  of  diminishing  return  are  laws 
reflecting  the  influence  of  change  in  the  relative  supplies  of 
the  different  factors  of  production.  It  is,  perhaps,  true, 
practically  speaking,  that,  but  for  the  limitation  upon  the 


514  VALUE  AND  DISTRIBUTION 

land  supply,  there  could  be  nowhere  any  question  of  dimin- 
ishing returns  for  social  or  dynamic  problems. 

And  it  is  again  to  be  emphasized  that,  with  changing 
supplies  of  productive  factors,  such  changes  of  combina- 
tion, of  product,  of  value  of  product,  and  of  values  of 
agents  as  take  place,  must  take  place  under  the  guidance  of 
entrepreneur  activity  and  as  problems  of  entrepreneur 
management.  Technological  productive  contributions  are 
such  only  relatively  to  the  entrepreneur  need,  the  entre- 
preneur combination,  and  the  entrepreneur  bid.  'As  dis- 
tinguished, then,  from  the  ordinary  threefold  classification 
of  productive  factors,  land,  labor,  and  capital,  there  must, 
at  the  least,  be  established  a  fourfold  classification  includ- 
ing the  activity  of  entrepreneurship.  And  our  most  serious 
problem  is  thereupon  to  decide  whether,  even  as  modified, 
the  traditional  distribution  of  productive  categories  is  either 
workable  in  theory  or  serviceable  in  applications.  ; 

Precisely  how  the  dynamic  forces  shall  be  classified  is, 
from  one  point  of  view,  perhaps  not  an  important  matter. 
Clark's  fivefold  division  into  changes,  (i)  in  population, 
(2)  in  capital,  (3)  in  industrial  methods,  (4)  in  business 
organizations,  (5)  in  human  wants,  is  possibly  as  service- 
able as  any  other.  Making  some  effort,  however,  toward 
arriving  at  a  classification  more  nearly  approaching  the 
ultimate,  we  shall,  perhaps,  settle  upon  something  like  the 
following":  (i)  modifications  in  humanity,  (2)  in  environ- 
ment. Under  modifications  in  humanity  are  to  be  cata- 
logued the  following  lines  of  change : 

(o)  in  numbers. 

{changes  in  aggregate  wants, 
changes  in  relative  intensity, 
changes  in  kind  and  direction. 

(  changes  in  industriousness  or  strength, 
(c)  in   capacity  <  changes  in  technique, 

(  changes  in  organization. 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        515 

Under  modifications  in  environment : 

...      1     J   j  changes  in  the  sources  of  food  supply, 

^  ^  \  changes  in  the  sources  of  raw  materials  of  industry. 

(b)  non-land  changes,  capital  goods. 

(from  the  point  of  view  of  each  entrepre-- 
neur  an  objective,  environmental  fact; 
from  the  social  point  of  view  merely  re- 
.^.. .^  ...^.^^     ,       lations  among  men;    perhaps  properly 

erty  institutions       /      ^^  ^^^  ^^^^^  «  modifications  in  human- 

\     ity." 

But  here  again  tlie  question  presents  itself  as  to  what 
purpose,  other  than  schematic,  this  classification  may  be 
made  to  serve;  but  if  for  nothing  further,  it  will,  at  any 
rate,  afford  a  convenient  guide  for  purposes  of  exposition. 

Doubtless  it  is  possible  to  make  some  broad  generaliza- 
tions with  regard  to  the  effects  of  increasing  population 
upon  land  values  and  upon  land  rents  in  the  aggregate, 
irrespective  of  whether  all  lands  must  equally  share  in 
these  eft'ects.  Possibly  also,  though  less  securely,  some- 
thing might,  in  wide  generalization,  be  said  of  the  effects 
of  increasing  machinery  upon  rents  or  upon  wages,  all  this, 
likewise,  without  attempt  to  differentiate  the  sorts  of 
machinery,  and  also  without  attempt  to  distribute  labor  into 
different  sorts  and  grades  in  its  technological  relation  to 
machinery. 

But  the  difficulty  with  all  this  is  that  all  of  it  has  its 
basis  in  the  technological  relation  of  different  instruments 
and  agents  to  one  another,  and  that  these  technological 
relations  will  not  classify  in  even  a  loose  and  general  coin- 
cidence with  the  traditional  threefold  classification  of  pro- 
ductive factors. 

Increase  of  literary  ability  is  technologically  irrelevant 
to  the  increase  of  inventive  power  in  industry ;  increase  of 
artisan  skill  may  intensify  the  demand  for  some  machinery, 
the  while  that  it  displaces  other.  Again,  the  multiplication 
of  unskilled  labor  may  in  some  directions  displace  skilled 
labor  or  the  labor-saving  appliances  produced  by  it.  It  is, 
for   example,   practically   impossible,   because   unprofitable, 


5i6  VALUE  AND  DISTRIBUTION 

to  introduce  labor-saving  machinery  into  Mexico  or  India; 
crude  labor  in  those  countries  is  too  cheap  compared  with 
artisan  labor.  At  the  same  time,  enlarged  supplies  of  some 
grades  of  labor  furnish  a  demand  for  other  grades  of 
labor,  e.  g.,  carpenters  for  architects  and  masons,  masons 
for  hod-carriers,  spinners  for  weavers,  and  so  on  indefi- 
nitely. Again,  some  machinery  creates  demand  not  for 
land  as  complementary  good,  and  not,  in  any  appreciable 
degree,  for  labor,  but  for  other  machinery.  In  the  history 
of  English  industry,  the  spinning  jenny  placed  an  immense 
premium  upon  the  invention  of  the  power  loom,  and  both 
called  shrilly  not  for  more  men  but  for  the  introduction  of 
power  machinery.^ 

And  mere  increase  in  population,  to  the  extent  that  it 
should  be  attended  by  the  traditionally  menaced  poverty, 
would  not  greatly  intensify  the  demand  for  champagne 
lands,  or  place  high  values  on  diamond  fields ;  something 
would  result  of  advantage  for  apple  and  prune  orchards, 
a  lower  degree  of  advantage  to  orange  and  walnut  groves, 
great  stress  upon  fuel  and  iron  mines,  and  famine  rents  for 
the  sources  of  the  coarser  foods.  New  coal  lands  would 
injure  the  wood  lots,  and  benefit  the  iron  mines.  New 
fisheries  would  probably  lower  the  income  from  pasture 
lands,  and,  perhaps,  intensify  the  demand  for  cereal  lands. 

The  truth  is  that  all  these  relations,  on  the  one  hand,  of 
complementarity,  on  the  other,  of  substitution,  depend  upon 
the  particular  situation  in  point  of  technique,  and  have  not 
even  the  remotest  relation  to  the  land-capital-labor  classi- 
fication. It  is  possible  enough,  it  is  indeed  characteristic 
of  modern  life,  that  modifications  in  technique,  that  is  to 
say,  in  the  human  factor  of  production,  greatly  reduce  the 
pressure  upon  land.  This  is  especially  noticeable  in  the 
effect  of  farm  machinery  toward  the  lowering  of  agricul- 
tural rents  taken  in  the  aggregate.  Improvements  in  trans- 
portation work  in  the  same  direction,  and  at  the  same  time 

"  Fully  worked  out,  the  doctrine  of  this  paragraph  has  some  impor- 
tant applications  to  immigration  problems. 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        51 7 

do  another  thing,  they  create  accessibility;  thus,  practically 
speaking,  they  create  land. 

So,  new  knowledge  is  constantly  sending  much  old 
machinery — and  some  new  machinery — to  the  scrap  pile, 
and  this,  not  rarely,  with  the  requirement  of  no  new 
machinery. 

So  again,  changes  in  the  standards  of  living  or  changes 
merely  in  the  direction  of  consvimption  may  cancel  the 
alleged  efifects  of  the  multiplication  of  human  beings  upon 
rent  and  interest:  for  example,  vegetarianism  would  post- 
pone the  land  famine  for  a  succession  of  centuries. 

And  changes  in  technique  may  conceivably  be  so  far- 
reaching  as  to  leave  to  humanity  practically  no  land  prob- 
lem at  all,  or,  at  least,  only  a  mining-land  and  dwelling- 
land  problem : 

Chemistry  may  some  time  solve  the  problem  of  food  production 
without  recourse  to  agricultural  methods.  The  secret  once  known, 
the  nitrogen  in  the  air  of  the  back  yard  and  the  ton  of  coal  in  the 
bin  may  furnish  food  for  an  ordinary  family  for  a  year.' 

But  none  of  this  is  to  deny  that  there  is  a  dynamics  to 
the  value  problem,  or  rather  to  the  distribution-and-cost 
aspect  of  the  value  problem,  but  only  to  deny  that  much 
more  can  be  done  with  it  than  to  surmise  here  and  there, 
as  well  as  may  be,  what  are  the  probable  changes  in  condi- 
tions, and  then  to  deduce  the  probable  and  possible  eco- 
nomic significance  of  some  few  of  these  changes. 

Increasing     population     appears     reasonably     probable, 
though  there  is  question  enough  as  to  the  races  and  the 

*  Davenport,  op.   cit,,   sec.   352. 

It  is  a  noteworthy  as  well  as  a  perplexing  fact  that  one  of  the 
economists  firmest  in  adherence  to  the  separate  land  and  capital  cate- 
gories, and  strongest  in  the  conviction  that  interest  and  wages  are  cost 
facts  while  rent  is  not,  should  have  given  allegiance  to  doctrine  which, 
sufficiently  elaborated  and  worked  out  to  its  necessary  conclusion, 
must  cancel  the  possibility  of  all  discussion  of  the  laws  of  return  as 
based  upon  the  threefold  division  of  categories ;  and  incidentally  also, 
would  strike  the  pen  across  most  of  the  pages  of  his  own  admirable 
arid  suggestive  work  upon  the  distribution  of  wealth.  (See  Carver, 
Distribution  of  Wealth,  p.  85,  or  quotation,  note  ante,  p.   131.) 


5i8  VALUE  AND  DISTRIBUTION 

classes  likely  to  furnish  the  increase.  No  attendant  changes 
appear  probable  of  a  sort  to  prevent  an  increasing  stress 
upon  land,  varying  in  degree,  it  is  likely,  according  to  the 
different  qualities  and  capacities  of  the  land,  but  probably 
affecting  in  some  measure  all  or  almost  all  lands.  But  the 
swamps  of  the  Amazon  or  the  African  jungle  may  for  a 
long  time  remain  an  undisturbed  surplus.  And  in  this 
connection  also  it  would  be  possible  for  the  growth  of 
land  rent  to  impose  important  changes  in  the  distribution  of 
purchasing  power  in  society,  and  thereby  to  work  appre- 
ciable modifications  in  the  direction  and  volume  of  different 
consumption  demands,  with  wide  and  conflicting  circles  of 
varying  interaction. 

From  the  land  source,  together  with  other  influences 
bearing  upon  the  consumable  product  at  the  disposal  of  the 
human  race,  more  or  less  pronounced  effects  may  be  deduced 
as  probable  upon  the  standards  of  living  of  the  different 
races  and  nations  of  men,  these  effects  being  different  with 
the  different  races  and  in  the  different  levels  of  society  of 
each  different  race.  And  various  interactions  between 
standards  of  living  and  rates  of  multiplication  may  be  more 
or  less  dubiously  asserted.  And  possible  bearings  of 
standards  of  living  upon  wages  may  be  worked  out  through 
the  general  relation  of  the  density  of  population  to  the 
wage  level. 

LOut  what  is,  in  truth,  other  things  remaining  unchanged, 
the  bearing  of  increasing  population  upon  the  wage 
level  ?i 

To  make  the  question  accurately  intelligible  it  must  be 
assumed  that  the  different  grades  and  kinds  of  labor 
increase  proportionally.  And  even  then  will  it  do  to  assert 
that  wages  must  fall?  How  comes  it  to  be  true,  if  it  is 
true,  that  the  volume  of  population  influences  the  wage 
level?  Is  it,  for  example,  possible  to  say,  with  Carver, 
that  "the  wages  of  labor  are  determined  by  an  equilibrium 
of  two  forces, — the  productivity  of  labor,  on  the  one  hand. 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        519 

creating  the  demand  for  it,  and  the  standard  of  living,  on 
the  other  hand,  limiting  the  supply  of  it."  * 

Not  at  all  denying  the  bearing  of  these  two  forces  as 
somehow  influencing  wages,  each  in  its  own  way  and  time, 
it  is  yet  to  be  objected  that  the  ways  and  the  times  are 
separate,  that  the  offered  explanation  of  wages  is  really  a 
mixture  of  long-time  and  short-time  influences, — on  the  one 
side  a  static  category,  a  situation,  on  the  other  side  a 
dynamic  variant  making  for  possible  changes, — and  then  a 
balance  somehow  struck  between  them.  The  analysis 
neither  stays  in  nor  abandons  the  field  of  entrepreneur 
wage  costs,  but  confuses  the  costs  as  they  are  with  supposed 
causes  of  the  costs,  and  with  possible  or  probable  variations 
of  the  costs.  But,  even  so,  the  argument  is  open  to  further 
serious  criticism ;  for  in  reality  the  standard  of  living  is 
itself  a  derivative  from  the  productivity  of  the  labor;  the 
standard  of  living,  as  supply  term,  set  over  against  pro- 
ductivity as  the  demand  term,  will,  then,  hardly  serve  as  a 
full  explanation  of  wages.  But  however  this  may  be,  it  is 
in  any  case  clear  that  as  a  question  of  existing  wages  the 
productivity  of  today  cannot,  for  any  purpose  of  present 
costs  or  present  wages,  or  under  any  entrepreneur  compu- 
tation, be  equated  against  the  labor  supply  of  some  years 
hence.  The  wages  of  all  the  yesterdays  and  of  today  may 
possibly  have  something  to  do  with  the  supply  of  labor 
twenty  years  hence ;  and  the  supply  of  labor  of  that  time 
will  doubtless  equate  against  the  demand  of  that  time.  The 
supply  of  today  has  precisely  that  same  relation  to  the 
demand  of  today.  Today  there  is  no  equating  of  the 
demand  or  supply  of  today  with  the  demand  or  supply  of 
any  other  time.  Any  alleged  efifect  from  wages,  through 
standards  of  living,  on  the  supply  of  labor, — whether,  on  the 
one  hand,  the  position  urged  be  that  high  wages  and  high 
standards  of  living  stimulate  the  birth-rate  and  the  per- 
centage of  maturities,  or  whether,  on  the  other  hand,  the 

*  Carver,  "The  Marginal  Theory  of  Distribution,"  Journal  of 
Political  Economy,  March,    1905,  p.    263. 


520  VALUE  AND  DISTRIBUTION 

effect  be  asserted  to  be  precisely  the  reverse — may  be  equally 
well  admitted  or  denied  with  equal  irrelevancy  to  all  prob- 
lems of  the  current  adjustment  of  wages ;  productivity  is 
as  it  is.  Investigation  of  these  lines  of  influence  is,  then, 
merely  a  more  or  less  successful  attempt  at  a  historical 
explanation  of  the  present  labor  supply,  and,  so  far  as  the 
labor  supply  has  to  do  with  the  individual  wage,  is  an 
attempt  to  explain  some  of  the  causes  of  the  present  condi- 
tions controlling  or  influencing  the  ruling  level  of  wages. 
But  the  ruling  level  of  wages  will  be  the  same 
whether  or  not  the  historical  explanations  offered 
be  well  supported.  So  the  wages  to  rule  twenty  years 
hence  may  today  be  possible  of  vague  conjecture ;  and 
in  the  making-up  of  the  prophecy  some  bearing  may 
be  ascribed  to  the  expected  population  totals  of  that  time ; 
and  these  totals  may,  with  more  or  less  justification,  be 
attributed  to  the  standards  of  living  prevailing  today.  But 
all  this  is  prophecy,  and  has  nothing  to  say  for  the  wages 
of  today. 

Nor — and  this  is  the  important  fact  for  the  present  dis- 
cussion— even  after  the  twenty-years'  term  has  expired, 
will  such  population  changes  as  may  have  taken  place  have 
overmuch  to  say ;  it  is  vastly  dangerous  doctrine  to  assert, 
even  on  the  supply  side,  the  dependence  of  wages  on  the 
supply  of  labor.  For  consumption  goods,  truly,  the  reason- 
ing rightly  runs  that  an  increased  supply  diminishes  price ; 
but  for  production  goods  the  doctrine,  so  far  as  it  is  appli- 
cable at  all,  applies  in  quite  other  significance  and  to  quite 
different  results.  Whenever  the  very  increase  in  supply 
itself  implies  and  necessitates  a  change  in  the  volume  of 
demand,  the  demand-and-supply  formula,  entirely  accurate 
for  consumption  goods,  becomes,  for  production  goods, 
entirely  misleading  unless  used  in  a  very  different  sense. 

If  the  labor  supply  increases,  how  can  anyone  know 
that  the  wages  must  fall?  Is  it  certain  that  either  the  per- 
capita  productivity  by  weight  and  tale  or  the  per-capita 
value    productivity    must    suffer?      Not    unless    the    other 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        521 

classes  and  qualities  of  agents  have  failed  to  make  a  corre- 
sponding increase.  And  suppose  that  they  have  not ;  with 
an  increased  labor  supply  the  social  dividend  is  increased; 
is  it  to  be  assumed  that  only  the  old  total  of  wages  can, 
under  the  new  aggregate  productivity  of  labor,  be  dis- 
tributed among  laborers?  If  labor  has  doubled  and  all 
kinds  of  it  have  doubled,  but  if,  at  the  same  time,  the  other 
productive  factors  have  failed  to  increase  or  to  increase 
with  corresponding  rapidity,  it  may  be  taken  as  true  that 
not  quite  twice  as  much  aggregate  social  product  will  be 
possible;  and  out  of  this  somewhat  smaller  per-capita 
product  a  larger  relative  share  will  go  to  the  agents  rela- 
tively scarce,  and  a  somewhat  smaller  relative  share  to  the 
laborers.  And  this  is  all  there  can  possibly  be  of  truth  in 
the  proposition  that  "the  wages  of  labor  are  determined 
by  an  equilibrium  of  forces — the  productivity  of  labor,  on 
the  one  hand,  creating  the  demand  for  it,  and  the  standard 
of  living  of  laborers,  on  the  other  hand,  limiting  the 
supply  of  it"   (Carver). 

To  put  it  another  way:  Since  with  the  change  in  the 
supply  of  labor  the  value  product  to  pay  with  is  all  the 
while  changing,  that  is,  the  productivity  demand  is  chan- 
ging, the  effect  upon  the  wage  level  must  sum  up  as  the 
solution  of  two  inquiries :  ( i )  in  what  measure,  relatively 
to  the  increase  of  labor,  is  there  a  resulting  increase  in  the 
total  product  to  be  distributed?  (2)  in  what  measure  does 
labor,  in  the  distributive  process,  fail  of  receiving  the  whole 
of  the  increase  in  product  resulting  from  the  labor  increase? 
It  is  evident  that  an  appeal  to  the  ordinary  demand-and- 
supply  formula  does  not  promise  great  results  for  the 
purposes  of  this  problem. 

Inasmuch  as  changes  in  population  can  take  place  only 
with  attendant  changes  in  the  demand  for  goods  and  in  the 
production  of  goods  and  in  the  distribution  of  purchasing 
power,  there  is  room  here  for  all  sorts  of  varying  influence 
upon  values  and  upon  distributive  shares.     No  especially 


Si2  VALUE  AND  DISTRIBUTION 

serious   difficulties,    however,    present    themselves    in    this 
regard. 

Possible  changes  in  the  productivity  of  human  effort, 
through  increases  in  vigor,  in  earnestness,  in  trustworthi- 
ness, and  in  skill,  require  some  attention.  And,  for  the 
moment,  let  changes  in  technique  be  excluded  from  con- 
sideration, so  that  the  case  may  stand  simply  as  one  of 
emphasized  power  in  lines  and  methods  and  directions 
already  established.  Twice  as  efficient  a  man  is,  for  pro- 
duction purposes,  two  men;  on  the  production  side,  this 
amounts,  then,  to  a  population  increase.  Are  land  rents  to 
be  thereby  increased,  or  is  the  value  imputation  in  general 
to  be  otherwise  affected  disadvantageously  to  labor? 
Seemingly  so;  for  while,  with  larger  weight-and-tale  pro- 
ductivity and  a  greatly  augmented  social  product,  the  abso- 
lute share  of  labor  may  increase,  its  ratio  share  will  suffer. 
But  all  this  is  subject  to  amendment  accordingly  as  the 
increased  purchasing  power,  attendant  upon  higher  pro- 
ductivity and  higher  wages,  turns  out  to  be  directed.  If, 
for  example,  all  this  new  demand  power  were  directed  to 
the  purchase  of  new  sorts  of  personal  service,  or  to  lines 
of  goods  in  which  labor  alone  could  be  applied,  the  new 
labor  power  could  furnish  no  new  demand  for  land  or  for 
any  other  instrumental  good,  and  no  advantages  in  distri- 
bution could  accrue  to  any  of  these  non-human  factors  of 
production  as  against  labor. 

Better  organization  of  production  may  be  merely  insti- 
tutional, or  it  may  point  directly  to  an  increase  in  entre- 
preneur efficiency;  if,  however,  it  be  assumed  that  the 
increase  of  product  is  due  solely  to  an  improvement  in 
entrepreneur  ability,  it  may,  prima  facie,  be  expected  that, 
out  of  the  resulting  higher  social  dividend,  the  larger  share 
will  be  distributed  to  the  non-increasing  factors,  employee 
labor  being  here  included.  But  here  also  the  breadth  and 
the  undiscriminating  inclusiveness  of  the  accepted  classi- 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        523 

fications  destroy  all  promise  of  accuracy  in  the  conclusions. 
Better  organization  does  not  apply  equally  to  all  grades  and 
kinds  of  labor,  or  equally  in  all  businesses  and  industries, 
or  equally  to  all  kinds  and  varieties  of  instruments.  The 
threefold  classification  must  be  especially  misleading  here. 
But  even  more  misleading  is  the  traditional  classifica- 
tion as  related  to  changes  in  technique.  Hygiene  may 
render  pill-rolling  machinery  useless ;  inventions  may 
largely  displace  both  labor  and  instrumental  goods,  and 
may  shift  the  emphasis  over  upon  land  generally  or  upon 
particular  kinds  and  qualities  of  land.  There  is,  in  truth, 
no  limit  to  the  possible  and  the  probable  permutations  here ; 
here,  indeed,  it  is  always  the  unexpected  that  is  the 
probable.  How  complicated  these  problems  are,  and  how 
dependent  for  their  solution  upon  assumptions  tacitly  made 
or  unconsciously  implied,  may  be  seen  in  an  analysis  of 
the  relations  of  improvements  in  transportation  and  in 
crop-raising  technique  to  the  rental  values  of  land.^ 


°  Traditional  discussion  of  the  rent  problem  has  assumed  a  prac- 
tically inelastic  consumption  for  the  products  of  agriculture.  Making 
no  question  that,  relatively  to  other  consumption  goods,  food  products 
manifest  a  great  inelasticity  of  consumption,  it  is  nevertheless  to  be 
asserted  that  this  inelasticity  has  been,  in  almost  all  rent  discussion, 
past  or  current,  greatly  exaggerated,  to  the  serious  prejudice  of  the 
theoretical  deductions.  It  is  at  any  rate  clear  that  "the  law  of 
diminishing  returns  falls  far  short  of  a  full  theoretical  equipment 
for  the  analysis  of  rent  movements.  This  law  points  merely  to  one 
very  important  fact  in  the  supply  aspect  of  the  problem.  But  dimin- 
ishing returns  are  the  condition  upon  which  rents  depend  rather  than 

their    ultimate    cause No    economic    explanation    in    terms    of 

supply   alone   is   exhaustive   or   satisfactory How    rapidly,    for 

example,  rents  may  advance  with  an  enlarging  market  for  products, 
must  depend  upon  the  measure  in  which  demand  will  be  retired  by 
rising  prices.  How  rapidly  rents  may  be  made  to  fall  by  the  opening 
up  of  new  lands,  is  incapable  of  estimate  till  something  is  known  of  the 
degree  in  which  falling  prices  may  be  expected  to  attract  a  larger 
consumption.  All  rent  tendencies  must  be  studied,  not  alone  from  the 
point  of  view  of  the  facts  peculiar  to  supply,  but  as  well  from  the 
point  of  view   of  the  peculiar  nature   of  the   demand. 

"Commodities  vary  greatly  in  the  elasticity  of  consumption.  With 
falling  prices,  the  demand  for  books,  for  example,  greatly  expands, 
while  higher  prices  would  be  met  by  greatly  decreased  consumption. 
Where  consumption  is  very  elastic,  small  changes  in  price  work  large 
changes  in  consumption.     It  follows,  then,  that  small  changes  in  supply 


524 


VALUE  AND  DISTRIBUTION 


The  relations  of  expanding  capital  supplies  to  land 
rentals  and  to  wages  can  be,  so  far  as  they  are  profitable  of 

must  work  small  changes  in  price,  while  large  changes  in  supply  work 
only  limited  changes  in  price. 

"But  where  the  consumption  is  inelastic,  the  reverse  of  all  this  is 
true.  Small  increments  in  supply  are  marketable  only  at  considerable 
decrease  in  price,  while  large  increases  in  supply  work  enormous  price 
reductions.  Much  that  is  peculiar  to  rent  movements  is  to  be  explained 
by  the  fact  that  the  consumption  by  society  of  the  products  of  the 
earth,  and  particularly  of  agricultural  products,  is  extremely  inelastic. 
Consumption  of  food  products  cannot  be  very  largely  increased,  nor  is 
it  possible  without  acute  suffering  greatly  to  reduce  consumption. 
It  is  true  that  in  considerable  measure  one  product  may  be  substituted 
for  another  by  reason  of  minor  changes  in  price,  but  the  total  volume  of 
consumption  adjusts  itself  to  the  total  volume  of  supply  only  through 
relatively  great  price  fluctuations.  Were  the  fact  otherwise,  advances 
in  rents  following  upon  increased  population  would  have  been  much 
less  considerable,  and  a  fall  in  rents  resulting  from  the  opening  up  of 
new  supplies  of  land  would  be  relatively  unimportant. 

"Bearing  in  mind  that  increasing  supplies  of  agricultural  products 
are  unmarketable  unless  at  rapidly  falling  prices,  it  becomes  evident 
that  all  causes  tending  to  increase  the  per-acre  productiveness  of  land 
will  mostly  manifest  themselves  in  the  abandonment  of  marginal  lands 
and  the  decrease  of  rental  totals.  Thus  all  progress  in  agricultural  skill, 
like  better  methods  of  crop  rotation,  or  improvements  in  the  applica- 
tions of  chemistry  to  the  production  of  fertilizers,  by  which  the  per- 
acre  output  of  land  is  increased,  will  tend  toward  the  disuse  of  the 
poorer  qualities  of  land.  Likewise  all  improvements  in  transportation 
facilities,  by  which  new  and  more  fertile  lands  are  brought  into  use  and 
the  abandonment  of  poorer  lands  made  possible,  must  reduce  the  rent 
differential. 

"And  even  with  the  new  lands  only  equally  fertile  with  the 
old,  the  reductions  in  the  cost  of  transportation  would  reduce 
the  differential  of  advantage  enjoyed  by  the  lands 
nearer  the  market.  Not  less  land  would  be  used, 
14  2  3°  17  but  the  difference  in  advantages  would  be  lowered. 
In  the  diagram  the  transportation  charges  of  2,  4, 
6,  8,  etc.,  give  rentals  of  14,  12,  10,  etc.  Reducing 
the  cost  of  transportation  by  one-half  lowers  the 
differentials  to  7,  6,  5,  4,  etc.  It  is  true  that  this 
cheaper  transportation  would  cause  some  of  the 
more  distant  lands  to  be  brought  into  cultivation. 
But  only  a  small  increase  in  products  could  be 
marketed  without  so  great  a  fall  in  price  as 
seriously  to   affect  rents  generally. 

"Assuming,  however,  that  the  land  opened  up 
is  of  distinctively  inferior  quality,  one  might  look 
for  a  rise  in  rents.  But  the  question  is  whether 
this  wider  differential  of  fertility  can  be  sufficient 
to  more  than  offset  the  diminished  differential  of 
transportation. 

"Suppose  that  the  land  is  30,  28,  26,  24,  etc.,  in 
productiveness,  and  that  the  transportation  charges  are  2,  4,   6,   8,   10, 


2 

30 

4 

30 

6 

30 

8 

30 

10 

30 

12 

30 

14 

30 

16 

30 

30 

1  7 

2  6 

3  5 

4  4 

5  3 

6  2 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        525 


6+3  = 

4+2  = 
2+1  = 


discussion  here,  mostly  deduced  from  the  principles  already 
established.     But  much  depends  upon  the  sense  in  which 

etc.,    as   in   the   previous    illustration.      Each   grade   of   land,    from   the 

margin,  increases  in  rent  by  2  for  differential  of  fertility,  and  by  2  more 

for    differential    of    freight. 

"If    now    the    freight    differential    falls    to    i    for    each    grade,    the 

rent  payments  will  fall  from  20  +  16  +  12  -r  8  +  4  to  15  +  12  +  9  +  6  +  3.     Even 

could  cultivation  extend  two  grades 
lower  without  a  material  fall  in  prices, 
10+5  =  15  this  would  carry  the  rent  payments  only 
to  21  +  18  +  15+12  +  9  +  6+3.  In  fact, 
8  +  4=12  however,  prices  would  greatly  fall  upon 
the  assumption  of  this  extension.  These 
lands  could  no  longer  be  treated  as 
30-,  28-,  etc.  (bushel)  times  one  (dol- 
lar) lands.  The  2,  4,  6,  8,  etc.,  as  dif- 
ferential in  bushels,  would  still  remain, 
but  these  bushels  would  have  greatly 
shrunk      as      measured      in      terms      of 

market    value 

"It  is  not  even  true  that  improve- 
ments in  the  art  of  agricultural  neces- 
sarily lower  rent,  if  these  improve- 
ments are  such  as  to  apply  solely  or 
mostly  to  the  better  lands.  If,  for 
example,   there  were  in  cultivation 

2  units  of  30-bushel  land 

3  '«        "  29-     " 

5  "        "  28-     " 

6  "        "  27-     " 

and  some  method  were  devised  of  doubling  the  output  of  classes  i  and 
2,  it  would  still  remain  necessary  to  cultivate  some  of  the  27-bushel 
land,  while  the  30  and  29  lands  would  have  become  60  and  58  lands 
with  their  rent   differential  measured   from  the   old   margin   of   27. 

"In  no  case,  then,  is  it  safe  to  assume  that  the  mere  fact  of  the 
extension  of  cultivation  to  inferior  lands  means  of  necessity  an 
increase  in  rents.  For  anything  like  an  accurate  forecast  of  rent 
tendencies  in  any  case,  there  is  required  a  Gregory  King's  law  of 
altogether  unattainable  accuracy.  Were  the  demand  for  agricultural 
products  as  elastic  as  is  the  demand  for  books,  or  sewing-machines,  or 
bicycles,  improved  arts  of  transportation  would  probably  raise  rents. 
If,  for  example,  rent  differentials  were  due  one-half  to  lower  expenses 
of  transportation,  and  these  expenses  were  reduced  by  one-half,  it 
would  become  practicable  to  cultivate  much  larger  areas  of  land,  if  the 
demand  for  products  were  such  that  the  prices  should  not  sharply 
fall.     In  this  case,  rents  would  increase  in  the  total. 

"Ultimately,  then,  we  fall  back  upon  the  character  of  the  demand 
as  the  critical  point  in  our  rent  investigation.  The  law  of  diminishing 
returns  explains  the  existence  of  rent  only  after  demand  is  assumed. 
The  degree  of  rise  or  fall  in  rent  can  be  guessed  at  only  in  view  of 
the  demand. 

"Some    questions    we    can    hardly    even    guess    at.      It    is    com- 


LAND 

10+  10  =  20 

30 

8+   8  =  16 

28 

6+   6  =  12 

27 

4+   4=   8 

24 

2+   2=   4 

22 

20 

18 

16 

14 

526  VALUE  AND  DISTRIBUTION 

the  term  capital  is  to  be  understood.  If  taken  as  loan- fund 
or  as  competitive  capital  in  the  most  inclusive  sense,  it 
would  follow  that  cheaper  capital,  meaning  merely  lower 
rates  of  interest,  might  raise  or  might  lower  rents  accord- 
ingly as,  under  the  prevailing  conditions  of  technique,  the 
borrowed  purchasing  power  should  be  directed  to  comple- 
mentary or  to  substitutionary  goods. 

But  if  the  term  capital  be  taken  to  mean  non-land  pro- 
ductive instruments,  further  assumptions  become  necessary. 
How  elastic  is  the  consumption  of  agricultural  products? 
And  how  far  is  it  taken  as  possible  that  non-land 
instruments  can  be  made  to  function  successfully  on  lands 
which  were  before  submarginal?  Costless  capital  goods 
might  conceivably  go  so  far  in  substitutionary  lines  as  to 
destroy  all  differentials  of  serviceability  between  different 
lands,  or  even  as  to  render  all  lands  equally  valueless. 

But  all  this  detail  grows  wearisome,  simply  because 
there  can  never  come  any  end  to  it;  at  the  best,  it  is  mostly 

monly  assumed  that  improvements  in  farm  machinery  work  in  line 
with  improved  fertilizers  and  improved  methods  to  reduce  rents.  This 
is  correct  for  such  machinery  as  increases  the  per-acre  output.  But 
for  the  most  part,  these  labor-saving  devices  are  not  land-saving 
devices.  They  increase  the  amount  of  land  employed  in  producing  a 
given  amount  of  product ;  thereby  they  lower  the  margin  of  fertility, 
exactly  reversing  the  effect  of  fertilizers.  If  rents  fall,  it  must  be 
from  the  fact  that  cultivation  is  carried  so  far  upon  inferior  soils,  as 
through  a  considerable  expansion  of  supply,  to  lower  prices,  and  to  do 
this  to  such  an  extent  that  the  influence  of  an  increased  differential 
in  product  is  overcome  by  the  necessity  of  marketing  the  products  at 
lower    prices." — Davenport,    op.    cit.,    pp.    86-91     (somewhat    adapted). 

But  a  caution  is  needed  here.  Doubtless  the  lands  especially 
affected  by  new  transportation  facilities  may  exhibit  a  marked  rise  of 
rentals.  So  likewise  the  opening  up  of  America  may  have  had  more 
effect  to  advance  rents  here  than  to  depress  rents  in  Europe  alone. 
This  means  merely  that  to  the  extent  that  the  agricultural  market  is 
world-wide,  so  must  also  be  the  rent  generalizations,  if  they  are  to  be 
theoretically   safe. 

But  neither  in  theory  nor  in  fact  does  room  for  doubt  remain  as 
to  the  validity  of  the  point  at  present  urged.  Improvements  in  trans- 
portation and  in  agricultural  technique,  improvements,  that  is,  in  the 
efficiency  of  human  effort  as  applied  to  production,  serve  to  reduce  the 
pressure  upon  the  land  factor  in  production, — function,  that  is  to  say, 
as  substitutionary  rather  than  as  complementary  agents. 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        527 

a  disciplinary  gymnastic.  But  this  much,  at  least,  stands 
forth  clearly :  Every  problem  in  the  dynamics  of  value,  in 
its  distributive  aspect,  must  seek  its  solution  along  two 
lines  of  inquiry:  (i)  how  does  the  new  development 
aflfect  the  social  dividend;  (2)  does  the  new  development 
bear,  as  complementary  good  or  process,  to  make  relatively 
greater  the  demand  for  the  instrument  or  agent  under 
examination,  or  rather  is  the  relation  one  of  substitutionary 
good  or  process,  summing  up,  that  is,  in  the  emergence  of  a 
new  competitor,  or,  practically,  in  an  increase  in  the  supply 
of  the  goods  under  examination? 

The  bearing  of  education  upon  the  various  distributive 
shares  must  be  worked  out  as  in  parallel  with  other  develop- 
mental influences  making  toward  increase  in  the  productive 
efficiency  of  human  effort ;  but  allowance  must  be  made  for 
the  different  effects  upon  different  grades  of  human  activ- 
ity,— the  probable  effect,  for  example,  to  lessen  the  differen- 
tials in  favor  of  entrepreneur  activity  as  against  employee- 
ship.  And  other  effects  toward  increase  in  the  volume  and 
in  the  variety  of  consumption  requirements  would  come 
in  here  for  discussion. 

A  seemingly  more  difficult  question  is  that  of  the  prob- 
able future  tendency  in  the  rate  of  time  discount.  So  far 
as  the  trend  of  things  is  toward  an  increasing  social  pro- 
ductiveness and  an  increasing  per-capita  share  in  that  prod- 
uct, and  thereby  a  diminished  pressure  of  subsistence  needs 
upon  the  individual  income,  it  would  seem  safe  to  infer  an 
increasing  volume  of  deferred  rights  of  consumption  offer- 
ing themselves  upon  the  market.  On  the  other  hand,  there 
appears  probable  a  progressive  development  in  the  science 
and  technique  of  industry.  Temporarily,  then,  at  any  rate, 
the  greater  ease  of  saving  may  be  offset,  in  effect  upon  the 
discount  rate,  by  the  increasing  weight-and-tale  productive- 
ness of  indirect  methods  of  production. 

But  here  again  much  depends  upon  the  degree  and  direc- 


528  VALUE  AND  DISTRIBUTION 

tion  in  which  improvements  in  technique  express  them- 
selves in  the  form  of  substitutionary  devices  and  instru- 
ments rather  than  of  complementary  instruments  in  relation 
to  the  general  stock  of  instrumental  goods.  It  is  con- 
ceivable that  knowledge  of  ways  of  getting  on  without 
capital  should  greatly  limit  the  capital-goods  field  of  invest- 
ment for  the  loan  fund. 

So  the  increase  of  savings  and  the  growth  of  capital 
goods  might  go  so  far,  in  directions  substitutionary  to 
particular  grades  or  qualities  of  labor,  as  to  depress  the 
wages  of  these  laborers  even  below  the  permanent  subsist- 
ence minimum.  But  it  is  difficult  to  conceive  how  laborers 
in  the  aggregate  could  seriously  suffer  through  any  pos- 
sible increase  of  capital  instruments  produced  in  the  main 
by  labor,  unless,  indeed,  these  instruments  were  of  a  sort  to 
function  with  reference  to  labor  as  substitutionary  goods, 
and  at  the  same  time,  with  reference  to  land,  as  comple- 
mentary goods.  In  such  case,  manifestly,  no  difficulty 
could  arise  in  any  lack  of  supplies  of  consumption  goods  at 
human  disposal,  but  only  with  the  distributive  titles  under 
which  the  distribution  would  take  place ;  rent  would  tend 
to  absorb  the  entire  social  product.  Parallel  theoretical 
possibilities  present  themselves  in  connection  with  such 
developments  in  methods  and  devices  as  should  tend  to  dis- 
place either  capital  goods  or  labor  or  both. 

And  there  is  possibility  in  many  industries  of  monopoly 
organization  going  so  far  and  so  profitably,  through  the 
increase  of  savings  and  of  capital  goods  by  entrepreneurs, 
and  through  the  decrease  of  consumption  demand  on  the 
part  of  the  laborers,  and  through  the  displacement  of 
labor  by  substitutionary  instruments,  as  to  bring  about 
either  a  progressive  non-employment  of  labor,  or  an 
employment  upon  increasingly  harsh  conditions,  and  to 
bring  about  at  the  same  time  a  tendency  toward  an  increas- 
ing volume  of  consumption  loans,  represented  either  by 
an  increasing  volume  of  indebtedness  from  the  non-capital- 
izing classes  to  the  capitalizing  classes,  or,  more  probably, 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        529 

an  increasing  resort  to  public  debts  both  by  the  employee 
class  seeking  employment  and  by  the  capitalizing  classes 
seeking  avenues  of  investment.*' 

"  But  all  of  this  leads  up  to  questions  fallingt  within  the  problem  of 
what  has  been  tenned  the  "fallacy  of  saving," — upon  which  problem  the 
present  writer  is   disposed   to   confess  himself   sorely   perplexed. 

Ruskin,  Robertson,  Hobson,  and  Veblen  seem  to  have  done  the 
best  work  here,  not  perhaps  toward  the  solution  of  the  problem,  but  to 
the  development  and  definition  of  it.  Surely,  the  ordinary  "capital" 
talk,  with  its  assumption  that  capital  must  be  both  concrete  goods  and 
relatively  to  labor  complementary  goods,  is  crassly  superficial.  And  the 
whole  subject  is  seemingly  in  intimate  and  intricate  relations  with  the 
phenomena    of   industrial    depressions.      (See    page    22-j,    note.) 

The   truth   may   be   something  as   follows  : 

So  long  as  industrial  technique  will  permit  the  utilization  of  new 
supplies  of  production  goods,  at  results  surpassing  in  service  the  dis- 
placed products  or  the  displaced  consumption  represented  by  the 
intermediate  appliances,  so  long  private  saving  may  be  a  clear 
advantage  to  society  as  a  zvhole,  but  this  only  upon  the  assumption  that 
the  saving  goes  to  the  increase  of  productive  equipment,  rather  than  to 
private  consumption  loans,  or  to  fiscal  extravagance,  or  to  the  orgies  of 
war. 

But  on  what  terms  can  any  agency  making  for  increased  volumes 
of  products  render  service  to  society?  Only  upon  the  condition  that 
the  products  are  to  be  consumed,  upon  the  condition,  that  is  to  say, 
that  the  standard  of  consumption  keeps  pace  with  the  increase  in 
productive  efficiency. 

But  even  so,  something  may  depend  upon  what  classes  of  society 
do  the  consuming.  Is  it  well  that  those  classes  receiving  large  incomes 
of  purchasing  power  shall  further  capitalize  to  the  indefinite  increase 
of  instrumental  goods,   or  would   they  better  consume  ? 

Note  that  the  question  is  not  at  all  whether  these  disposable 
incomes  were  reputably  earned,  or  were  institutionally  justifiable,  or,  on 
the  contrary,  were  predatorially  obtained,  or  were  better  otherwise 
distributed,  but  only  whether,  once  obtained,  and  however  obtained, 
they  are,  from  the  point  of  view  of  the  other  classes  of  society,  better 
consumed  forthwith  by  their  recipients,  or  are  better  directed  into  the 
creation    of    new    technological    equipment. 

We  must,  then,  first  inquire  whether  and  in  what  degree  tech- 
nological capital  may,  in  ordinary  times,  affect  the  distributive  shares 
of  other  factors  and  claimants  in  production. 

If  it  were  true  that,  for  whatever  addition  to  product  were  due  to 
the  new  instruments,  an  equivalent  income  accrued  to  the  owners  of 
these  instruments,  it  would  follow  that  other  claimants  could  have  no 
interest  in  the  increase  of  capital.  The  problem  is,  then,  in  this 
aspect,  a  problem  in  the  theory  of  distribution  ;  for  it  is  clear  that  in 
the  imputation  of  distributive  shares,  the  other  claimants  will  receive 
some  share  of  that  product  mechanically  attributable  to  the  enlarged 
supplies  of  technological  goods.  In  this  sense  only,  and  by  this  method 
only,  does  the  employer's  capital  benefit  the  laborers  or  other  claim- 
ants. Any  solution  which  directly  deduces  from  the  fact  of  an 
increasing  social  dividend  made  possible  by  capital,  or  from  the  fact  of 


530  VALUE  AND  DISTRIBUTION 

But  let  it  be  assumed  that  an  advance  in  rentals  is  to 
accrue  to  certain  classes  of  instrumental  goods,  e.  g.,  land ; 
will  this  advance  in  rentals  express  itself  in  a  higher  per- 

better  tools  in  the  hands  of  labor,  a  larger  wage  for  the  laborer,  is  a 
solution   superficial    in   reasoning   and   inaccurate   in  conclusions. 

Thus  it  is  clear  that  such  part  of  private  capital  as  actually  goes 
to  the  increase  of  productive  equipment  benefits  the  laborers,  and  other 
claimants,  if  and  when  the  consuming  disposition  of  society  is  keeping 
pace  with  its  productive  power  ;  but  this  advantage  is  limited  to  what 
the  technological  equipment  adds  to  product  more  than  the  distributive 
share  imputed  to  the  equipment. 

It  is  then  mostly  or  largely  true  that  the  capitalist's  role  is  here 
only  one  of  postponed  consumption  on  terms  of  receiving  later  an 
increased  volume  of  consumption.  There  is,  however,  in  the  total,  an 
advantage  to  labor,  so  long  as  there  is  market  both  for  its  product  and 
for  the  product  of  the  extra  equipment.  But  when  and  how  far  is 
there  this  market?  Is  consumption  by  the  capital-owners  and  by 
the  rich  generally  a  necessary  fact,  if  the  volume  of  consumption  is 
to  keep  pace  with  the  volume  of  product?  And  when  this  is  answered, 
what  about  the  private  capital  which  is  unrepresented  by  technological 
equipment  and  the  correlative  incomes  unrelated  to  increased  product? 

The  question  whether  standards  of  consumption  do  commonly  keep 
pace  with  productive  power  so  that,  commonly,  no  surplus  productive 
equipment  comes  to  exist,  and  the  question  whether  standards  of  con- 
sumption must  commonly  thus  keep  pace,  are  distinct  and  separate 
questions.  To  the  present  writer  it  appears  to  be  true  that,  excepting 
in  times  of  post-crisis  depression,  the  standards  of  consumption  do 
now,  in  most  modern  societies,  manifest  the  requisite  power  of  expan- 
sion, but  that  there  is  no  theoretical  necessity  for  this ;  and  it  appears 
equally  clear  that  in  post-crisis  times  there  is  a  distinct  and  disastrous 
restriction  of  consumption,  with  the  result  (i)  that  much  equipment  is 
temporarily  a  surplus,  and  (2)  that  in  some  measure  there  takes  place 
in   industrial    processes   a   displacement   of   labor   by    capital    goods. 

And  it  appears  to  be  true  that  the  very  fact  that,  through  develop- 
ing technique  and  increasingt  equipment,  a  high  per-capita  productivity 
obtains,  with  a  large  margin  of  average  individual  income  over  impera- 
tive individual  need,  explains  how  it  may  occur  and  does  often  occur 
that  the  volume  of  consumption  varies,  and  that,  through  sharp  restric- 
tion of  consumption,  industry  is  subjected  to  periodic  reverses  and  to 
the  periodic  wastes,  insolvencies,  and  starvations  which  bad  times 
connote. 

We  seem,  then,  to  have  come  safely  thus  far :  that,  from  the  social 
point  of  view,  saving  should  neither  go  to  the  extent  of  subtracting 
from  present  consumption  more  in  utility  than  is  added  by  the  later 
increase  of  output,  nor  so  far  as  to  increase  the  later  product  to  the 
extent  that  the  later  consuming  disposition  will  not  absorb  it ;  the 
limits  of  rational  saving  are,  then,  set  by  the  prospective  elasticity  of 
consumption. 

But  now,  precisely  where,  if  anywhere,  does  this  leave  us  with 
regard  to  the  problem  of  luxurious  consumption  for  those  times  when 


DYNAMICS  OF  VALUE  AND  DISTRIBUTION        53 1 

centage  ratio  of  time  discount,  or  in  a  higher  capitalized 
value  with  an  unchanged  rate  of  discount? 

Such  reply  as  may  be  given  is  neither  precisely  to  the 

the  general  attitude  is  one  of  overabstinence, — of  overemphasis,  that  is, 
upon   future   consumption   as   against   present   consumption  ? 

If  in  prosperous  times  the  consumption  of  the  rich  displaces,  in 
the  main,  only  their  own  later  consumption,  it  must  be  still  clearer 
that  any  expansion  of  consumption  in  times  of  depression  cannot  be 
at  the  expense  of  the  consumption  of  others.  And  obviously,  if  the 
luxury  of  the  rich  employs  productive  energies  that  otherwise  would 
not  function,  such  harm,  if  any,  as  can  result  to  others  must  be  found 
in  the  direction  of  influences  peculiar  not  to  luxurious  but  to  ostenta- 
tious consumption,  that  is  to  say,  not  in  the  direction  of  any  influence 
to  restrict  the  absolute  size  of  the  incomes  of  others,  but  only  the 
significance  of  those  incomes.  And  if,  in  times  like  these,  charity 
would  be  in  any  aspect  justifiable,  these  luxurious  expenditures  have 
some  obvious   advantages  over   charity. 

But  what  in  such  case  are  the  economic  effects  of  charity? 

People  who  can  find  no  work  to  do  live  somehow  out  of  the 
actual  product  of  industry,  whether  by  the  using-up  of  their  own  saved 
purchasing  power,  or  by  charity,  or  by  loan.  If  we  may  assume  that, 
through  offered  charity,  their  consumption  is  increased,  and  yet  not 
at  the  expense  of  the  consumption  of  others,  but  only  with  the  result 
that  more  goods  have  been  caused  to  be  produced,  it  would  appear  to 
be  true  that  the  charity  has  meant  added  consumption  for  the 
recipients  and  added  employment  for  others  ;  and  if,  with  their  larger 
income,  these  others  should  be  minded  to  increase  their  present  rate 
of  consumption,  this  industrial  stimulus  would  be  passed  forward 
one  degree. 

The  case  would,  then,  stand  as  follows :  by  means  of  the  substi- 
tuted consumption  of  the  recipients,  an  existing  claim  against  the 
products  of  others  has  been  collected  in  the  present  and  canceled, 
instead  of  being  postponed  for  collection  and  cancellation  to  the  future; 
and  the  collection  has  taken  place  at  a  time  when  society  has  been 
able  to  achieve  the  cancellation  through  the  employment  of  productive 
energies    that    otherwise    would    have    gone    to    waste. 

This  argument,  if  valid — which  is  doubtful  enough — means  much 
for  the  methods  and  the  times  of  the  carrying-forward  of  public 
work.  But  even  without  the  support  of  this  particular  argument,  it 
should  be  fairly  obvious  that  public  improvements  ought  to  be  under- 
taken in  times  only  of  slack  employment,  and  ought  to  be  paid  for  in 
times  of  prosperity,  rather  than,  as  in  present  practice,  carried  on  in 
prosperous  times  and  on  terms  of  displaced  production,  and  paid  for 
in  times  of  depression. 

But  what  does  the  argument  imply  for  the  social  advantage  of 
such  savings  as  does  not  express  itself  in  the  increase  of  the  productive 
equipment  of  society,  but  instead,  flows  into  consumption  loans  or 
goes  to  finance  fiscal  deficits?  Here  nothing  but  condemnation  is 
possible.     Any  private  investment  which,  for  any  considerable  period  of 


532  VALUE  AND  DISTRIBUTION 

one  effect  nor  to  the  other.  The  value  of  each  and  every 
instrument  will  he  a  capitalization  based  upon  the  current 
discount  rate;  but  this  discount  rate  will  be  the  point  at 
which  all  the  savings  in  loan-fund  form,  the  general-pur- 
chasing-power form,  find  a  market  among  tlie  various 
demands  of  borrowers  for  consumption  purposes,  for  soci- 
ally productive  purposes,  and  for  privately  acquisitive  pur- 
poses. The  technological  demand  is  only  a  part  of  the 
entire  demand. 

time,  takes  toll  from  social  product  by  other  title  than  of  equivalent 
addition  to  that  product  is  a  socially  disastrous  thing.  No  matter 
what  personal  or  moral  justification  there  may  seem  to  be,  and 
as  between  man  and  man  may  really  be,  the  case  is,  in  last  analysis, 
nothing  but  serfdom   on  the   one  side,  and  parasitism  on  the  other. 


CHAPTER  XXV 
THE  ADJUSTMENT  OF  PRICE 

Such  examination  of  the  psychology  of  utility  and  of 
valuation  as  falls  within  the  sphere  of  economics  to  under- 
take has  already  been  attempted,  with  something  over. 
(See  note,  p.  307.)  For  present  purposes  it  suffices  that 
market  prices  may  always  safely — albeit  superficially — be 
redviced  to  a  problem  of  adjustment  between  the  forces  of 
demand  and  supply.  But,  even  so,  there  remain  some 
aspects  both  of  demand  and  supply  and  of  the  process  of 
adjustment    still    requiring   attention. 

For  purposes  of  analysis  and  of  exposition,  the  device 
of  plotting  demand  and  supply  volumes  into  intersecting 
curves  expressive,  at  their  point  of  intersection,  of  the 
place  and  the  method  of  market-price  adjustment,  has  suffi- 
ciently   demonstrated    its    claim    to    serviceability.^      It    is, 

'■  Oddly  enough,  the  general  adoption  of  the  plotting  methods  has 
not  availed  to  remove  the  old-time  ambiguities  connected  with  the 
demand  and  supply  notions.  Potential  demand,  or  excluded  demand, 
and  potential,  or  excluded,  supply,  are  clearly  brought  out  in  the 
plotting  device,  as  are  also  the  respective  relations  to  the  actual  and 
the  possible  adjustments  of  price.  Nevertheless,  the  bad  logic  of  the 
terminology  which  employs  the  concepts  of  demand  and  of  supply  to 
explain  price  and  then  defines  demand  and  supply  as  derivatives  of 
price,  still  abides.  Ruskin's  inspirational  methods  touched  the  heart 
of  the  case  when  he  wrote,  "The  economists  mean  by  demand  'the 
quantity  of  a  thing  sold.'  I  mean  by  it  the  force  of  a  buyer's  capable 
intention  to  buy.  In  good  English,  a  person's  demand  is  not  what  he 
gets,  but  what  he  asks  for."  (Munera  Pulveris,  chap,  iii,  "Ad 
Valorem.") 

And  so  Pantaleoni : 

"When  price  falls,  a  determined  scale  of  wants  being  given,  more 
consumers  purchase  :  when,  on  the  contrary,  prices  rise,  fewer  con- 
sumers purchase.  Here  we  have  to  do  with  the  extension  or  restric- 
tion of  consumption  in  accordance  with  a  given  and  determinate  lazv 
of  demand.  But  the  extension  or  restriction  of  consumption  is  termed 
an  extension  or  restriction  of  the  demand,  which  gives  rise  to  endless 
ambiguities.  By  the  use  of  the  graphic  method  these  ambiguities 
are     avoided The     consumption,     to     speak     accurately,      or 

533 


y 


534  VALUE  AND  DISTRIBUTION 

however,  at  the  same  time  true  that  the  uses  actually 
made  of  curves  of  utility  and  curves  of  demand  have  been 
prolific  of  much  loose  thinking, — this,  for  the  most  part, 
because  of  the  lack  of  differentiation  between  curves  of 
individual  utility  and  curves  of  group  or  social  utility,  and 
between  curves  of  individual  demand  price  and  curves  of 
group  demand  price. 

As  referring  to  the  individual,  precisely  what  may 
demand  or  utility  curves  be  made  to  express?  As  of  any 
one  time,  and  for  any  individual,  it  is  undoubtedly  pos- 
sible to  construct  a  curve  of  utility  for  all  of  the  various 
items  of  a  stock  of  precisely  similar  goods ;  but  it  is  seem- 
ingly impossible,  and  it  is  certainly  profitless,  to  attempt  to 
include  in  the  formulation  more  than  one  kind  and  one 
grade  of  goods.  And  with  reference  to  any  one  kind  and 
grade  of  goods,  at  any  given  point  of  time,  a  demand  curve 
in  terms  of  price  is  also  easily  possible  of  construction  for 
the  individual ;  and  for  any  given  point  of  time,  a  total- 
expenditure  curve,  expressive  of  the  distribution  of  pur- 

figuratively  the  demand,  is  extended  or  restricted  ;  but  it  neither  rises 
nor    falls"    {Pure   Economics,    Macmillan,    1898,    pp.    148,    167). 

Flux  also  is  accurate  in  essentials  : 

"The  state  of  demand  may  be  really  unaltered  while  the  amount 
demanded  [  ?]  responds  to  changes  of  price  quotations.  Price  change, 
in  fact,  leads  to  extension  or  restriction  of  the  amount  demanded,  or, 
as  is  commonly  said,  of  the  demand,  though  this  phraseology  does  not 
really  describe  the  true  nature  of  what  is  occurring"  (op,  cit., 
p.  30). 

The  following,  however,  are  examples  of  the  more  common  but 
less  defensible  usage : 

Seager:  "The  general  law  of  demand  is  that  it  varies  directly 
with  changes  in  the  intensity  of  wants,  and  inversely  with  changes  in 

the    prices    that    must    be    paid     for    goods When    demand 

increases  or  decreases  readily  in  response  to  price  changes,  it  is  said 
to  be  elastic"   {op.  cit.,  p.  66). 

Hadley :  "In  any  given  market,  the  supply  of  an  article,  in  its 
technical    sense,   is  the   amount  offered   at   a  given   price.      It   tends   to 

increase   as  the  price   diminishes The   demand   for  an   article 

is    the    amount    which    will    be    taken    at    any   given    price.      It   tends    to 

increase    as    the    price    diminishes The    market    price    for    an 

article  ....  is  the  price  at  which  the  demand  is  equal  to  the  supply" 
(op.  cit.,  p.  74). 

Fetter:  "In  the  case  of  any  good  ....  a  change  in  its  ratio 
to  other  goods  will  increase  the  demand"  (op.  cit.,  p.  29). 


THE  ADJUSTMENT  OF  PRICE  535 

chasing  power,  in  terms  of  some  standard,  among  all  the 
different  grades  and  kinds  of  commodities  is,  theoretically, 
within  easy  accomplishment. 

But  for  any  group  of  individuals,  a  utility  curve  is, 
as  we  have  seen,  a  hopeless  impossibility.  A  group 
demand-price  curve  for  any  one  kind  and  grade  of  article 
is  readily  attainable ;  and  a  group  demand-price  curve  for 
commodities  in  general  is  also  a  possibility;  but  this  last 
only  in  the  sense  that,  as  such,  no  curve  remains,  but  only 
an  aggregate  market-price  adjustment  expressive  of  the 
price  relations  of  all  the  different  exchanging  goods.  All 
this,  however,  may  require  elaboration : 

For  any  one  kind  and  grade  of  commodity,  the  indi- 
vidual curve  of  falling  utility  per  unit  of  commodity,  as 
distinguished  from  a  falling  price-paying  disposition,  could 
have  little  or  no  significance  as  expressive  of  absolute  utility 
magnitudes ;  not  that  some  common  denominator,  in  units 
of  pleasure,  or  of  satisfaction,  or  of  desirability,  or  of 
choice,  might  not  exist  in  the  individual  psychology;  but, 
if  existent,  it  could  hardly  be  expressed,  and,  if  expressible, 
could  hardly  be  of  service.  The  significance  of  the  curve 
is  in  the  expression  not  of  the  absolute  utility  magnitude 
of  the  different  items  of  the  stock,  but  only  of  their  relative 
significance.  The  marginal  item  also  could  become  only 
vaguely  quantitative  in  meaning,  quantitative  in  the  sense 
merely  of  asserting  a  smaller  utility  than  that  of  any  other 
item  in  the  series. 

There  is,  therefore,  no  measure  function  anywhere 
expressed  in  the  utility  or  marginal-utility  analysis ;  the 
very  fact  that  the  series  is  a  series,  and  that  the  law  of 
satiation  which  it  expresses  implies  that  the  items  are  of 
diminishing  utility  volume,  makes  each  item  incapable 
of  serving  accurately  as  the  utility  equivalent  or  measure  of 
any  other. 

Nor,  as  we  have  seen,  is  it,  with  the  individual  demand- 
price  schedule,  possible  to  find  a  measure  of  utility  in 
money.      The    limit   of    price   offer    expresses    merely    an 


536  VALUE  AND  DISTRIBUTION 

equivalence  in  utility  between  the  thing  in  prospect  and 
some  foregone  alternative.     (See  page  315.) 

It  follows  that  the  total-expenditure  schedule  of  the 
individual  indicates  not  absolute  utilities,  but  only  what 
uses  will  be  made  of  the  individual's  fund  of  purchasing 
power  as  against  the  competing  claims  of  other  desirable 
commodities.  And  no  item  of  expenditure  among  all  the 
items  need  be  marginal  in  the  sense  of  being  at  indifference 
between  the  actual  direction  and  the  alternative  direction 
of  purchase.  The  marginal  unit  of  expenditure  will  be 
merely  the  lowest-service  unit  of  all,  without  any  neces- 
sary or  probable  implication  as  to  the  absolute  size  of  it. 
Any  attempted  reduction  for  the  individual  of  all  the 
different  commodities  into  one  utility  curve  or  schedule 
could,  at  best,  be  a  mere  repetition  of  the  original  expendi- 
ture curve. 

But  it  can  hardly  be  too  many  times  repeated  that,  so  far 
as  concerns  utility  schedules,  we  can  never  get  beyond  the 
individual.  Society  can  have  no  utility  curves  or  computa- 
tions, unless  upon  some  heroic  assumption — nevertheless 
possibly  inevitable  in  socialism — that  all  men  are  alike,  or, 
at  all  events,  that  their  differences  may  or  must  be  over- 
looked. As  between  different  individuals,  there  can  be  no 
comparison  of  utilities  either  quantitatively  or  qualitatively. 

There  may,  however,  be  constructed  for  any  one  kind 
and  grade  of  commodity  a  social  or  market  price-demand 
curve,  a  curve  indicative  of  the  varying  volumes  of  com- 
modity marketable  at  the  different  prices  set  in  the  schedule. 
But  neither  for  the  group,  nor  for  society  as  a  whole,  nor 
for  any  individual  within  the  group  is  the  price  offer 
indicative  of  any  absolute  utility  magnitude. - 

^  As  forcibly  illustrating  this  mixup  between  the  individual  utility 
curve  and  the  individual  price-offer  curve, — ^between  the  possible  indi- 
vidual utility  curve  and  the  impossible  group  or  social  utility  curve, 
and  between  the  individual  demand-price  curve  and  the  group  or  social 
demand-price  curve,  Macfarlane's  "grapbic  representation  of  the 
marginal-utility  theory"  (Value  and  Distribution,  p.  37)  is  espe- 
cially worthy  of  citation.  "The  utility  of  successive  increments  of 
commodity  is  represented  by  lines  at  right  angles  to  O  M Ac- 


THE  ADJUSTMENT  OF  PRICE 


537 


The  relations  between  the  individual  desire  and  the 
individual  price-offer  curve,  and  of  both  of  these  to  the 
market-price-offer  curve,  require  some  further  attention. 

How  much  of  today's  fund  of  purchasing  power, 
money  or  credit,  shall  a  given  individual  turn  toward  the 
acquiring  of  wheat?  Not  merely  the  hunger  of  today,  but 
the  foreseen  hunger  of  later  days  must  be  taken  into  the 
reckoning,  as  must  also  the  expected  future  supplies  of 
wheat  and  the  expected  future  command  of  purchasing 
power,  and  over  against  all  this  must  be  examined  the  same 


cording  to  the  marginal  utility  theory,  the  value  of  the  whole  com- 
modity is  determined  by  the  utility  of  the  last  increment  of  supply." 
So  "A  U  or  M  N  represent  severally  the  marginal  utility  or  value 
per  unit  of  the  commodity." 


V 

[= 

\^ 

N 

n 

A  MS 

Accurately,  this  curve  might  represent  the  utility  curve  of  any  one 
commodity  for  any  one  individual  at  any  given  time,  or  it  would  serve 
for  his  price-demand  curve,  or  for  the  price-demand  curve  of  society 
as  bearing  upon  any  one  commodity  at  any  one  time ;  but  it  cannot 
serve  for  utility  curve  and  price-demand  curve  together,  whether  for 
some  one  individual  or  for  society.  A  price-demand  curve  differs 
from  a  utility  curve,  where  this  latter  is  possible,  in  that  the  price- 
demand  curve  shows  the  effect  of  the  desire  for  other  things.  Thus, 
even  though  the  utility  curves  of  several  different  men  could  be 
identical,  there  would  be  as  many  different  demand  curves  as  there 
were  dift'erent  men,  and  the  demand  curve  of  any  one  man  would  vary 
with  different  days,  even  though  the  utility  curve  might  conceivably 
not  do  so.  So,  when  Macfarlane  is  going  to  have  A  U  or  M  N  repre- 
sent the  marginal  utility  or  unit  value  of  the  commodity,  he  is 
again  confusing  the  possible  interpretations  of  the  diagram  ;  he  is 
really  treating  the  curve  not  as  a  utility  curve  of  any  sort  but  as  a 
social  demand-price  curve  expressive  of  different  volumes  of  purchas- 
ing disposition  in  view  of  the  differing  individual  comparisons  and 
decisions  as  to   the   respective   applications   of   purchasing   power. 


538  VALUE  AND  DISTRIBUTION 

total  of  considerations  as  bearing  upon  the  competing 
claims  of  all  other  directions  of  expenditure.  That  is  to 
say,  a  purely  personal  system  of  discounting  future  facts 
into  bases  of  present  activity  must  be  applied  over  a  wide 
commodity  field,  before  the  individual  can  decide,  in  any 
given  case,  whether  he  shall  buy  wheat  or  raiment,  or 
rather  hold  for  future  occasions  certain  items  of  unspe- 
cialized  purchasing  power.  Thus  today's  hunger-utility 
line,  if  it  could  be  drawn,  and  today's  price-demand  line,  as 
it  can  be  drawn,  must  both  be  lines  of  steep  descent,  since  the 
appetite  for  food,  and  particularly  for  any  one  sort  of 
food,  is  quickly  satiated.  Not  so,  however,  when  the  long- 
time aspect  is  included  in  the  computation.  As  the  needs 
of  days  ahead,  or  even  of  weeks  and  months,  make  them- 
selves felt  in  thought,  the  price-offer  line  descends  not  at 
all  so  sharply ;  possibilities  of  storage,  of  decay,  of  ravages 
by  vermin,  as  well  as  possibilities  or  probabilities  on  the 
side  of  future  supplies,  future  needs,  and  future  purchasing 
power,  all  are  data  in  the  problem.  But  in  view  of  each 
man's  situation  and  prospects,  the  law  of  satiety  holds, 
and  a  limit  comes  to  the  purchasing  disposition  as  reaching 
out  toward  wheat.  This  curve  does  not,  however,  find  its 
lowest  offer  item  at  the  point  of  satiation  but  at  the  point 
where  some  stronger  pull  attaches  upon  the  purchasing 
power  in  hand.  The  items  of  price  offer  in  the  individual's 
wheat-demand  schedule  will  therefore  probably  scatter 
themselves  along  at  considerable  intervals  in  the  construc- 
tion of  the  individual's  general-expenditure  schedule  or 
curve,  this  last  curve  serving  to  express  the  same  facts 
which,  from  another  point  of  view,  might  stand  as  the  indi- 
vidual's money-utility  curve. 

It  is  now  to  be  noted  that  the  individual's  price-offer 
curve  for  any  particular  line  of  goods,  and  the  individual 
expenditure  schedule,  are  both  worked  out  upon  the  assump- 
tion of  a  given  price  situation  for  each  and  every  line  and 
grade  of  commodity ;  very  considerable  modifications,  there- 
fore, in  the  amount  of  each  comjuodity  demanded,  and  in 


THE  ADJUSTMENT  OF  PRICE  539 

the  general  distribution  of  purchasing  power,  might  follow 
upon  a  change  in  the  price  of  any  single  commodity.  The 
action  of  each  individual  in  the  market  is,  as  we  have  seen, 
to  be  regarded  rather  as  the  result  of  the  market  situa- 
tion than  as  the  cause,  though  each  individual  activity  is 
in  turn  to  be  taken  as  part  of  the  entire  cause. 

And  out  of  all  these  individual  offer  dispositions,  how 
construct  the  aggregate  or  social  price-offer  curve?  This 
problem  applies  to  only  one  commodity,  and  can  refer  only 
to  the  various  amounts  of  this  good  which  will  be,  under 
given  conditions,  purchased  at  different  levels  of  price. 
And  here  again  an  existing  medium  of  exchange  and  an 
established  general  level  of  prices  are  assumed.  Precisely 
how,  otherwise,  the  aggregate  demand  bearing  upon  any 
one  commodity  could  be  expressed  or  formulated,  or  even, 
for  present  purposes,  described,  is,  indeed,  hard  to  con- 
ceive ;  to  the  present  writer,  at  least,  the  problem  would 
seem  hopeless.  The  solution  for  the  individual  case  is 
clear  enough,  but  is  precisely  of  a  sort  that  will  not  com- 
bine with  other  individual  solutions  in  a  way  to  render  pos- 
sible of  construction  an  aggregate  barter-demand  curve. 
For,  as  has  been  already  pointed  out,  each  individual  desir- 
ing to  barter  away  any  part  of  his  possessions,  and  failing 
to  find  an  opportunity  to  exchange  the  particular  item  to  be 
sold  against  the  precise  thing  demanded,  will  barter  for 
such  third  sort  of  commodity  as  seems  to  him  most  likely  to 
serve  best  as  an  intermediate ;  and  it  is  not  to  this  writer  at 
present  evident  how  these  various  lines  of  barter  exchange 
and  this  multiplication  of  media  could  be  made  theoretically 
manageable  in  a  market-value  analysis.  Seemingly  each 
instance  of  barter  would  be  a  matter  of  separate  bargain 
adjustment,  modified  only  by  the  report  of  how  similar 
trades  were  elsewhere  being  made,  and  also  by  each  indi- 
vidual trader's  opportunities  and  devisings  as  to  some  other 
possible  roundabout  method  of  achieving  his  ends. 

The    social    demand-price   curve   presents    nothing   like 
similarity  in  direction  to  any  of  the   individual   demand- 


540 


VALUE  AND  DISTRIBUTION 


price  curves  combining  to  make  it.  The  individual  price- 
offer  curves  of  A,  B,  C,  D,  and  E,  say  for  bread,  being 
assumed  as  respectively  depicting  price  demands  of  9,  8, 
7,  6,  5 ;  8,  7,  6,  5,  4 ;  7,  6,  5,  4,  3 ;  6,  5.  4,  3-  2 ;  5,  4,  3.  2,  i, 
and  as  represented  in  plotting  as  lines  of  a  45-degree  declen- 
sion, would,  as  an  aggregate  demand  volume  of  9,  8,  8;  7,  7, 
7;  6,  6,  6,  6;  5,  5,  5,  5,  5;  4,  4,  4,  4;  3.  3-  3;  2,  2;  i,  plot 
into  a  group  demand  curve  represented  as  follows : 


\ 

'\ 

^ 

\ 

'\ 

^ 

*»^ 

'\ 

^ 

' — , 

'•.. 

'->. 

— ■ 

S- 

— 

■- 

-^ 

'n. 

\ 

'\^ 

"^ 

"S- 

.^ 

\ 

\J^ 

\ 

1 

•x 

\ 

The  value  equation  requires  a  supply  as  well  as  a 
demand  term;  but  it  does  not  require  the  assumption  of  a 
produced  or  of  an  elastic  supply.  To  make,  therefore,  still 
clearer  the  concept  of  demand,  and  to  prepare  for  the 
introduction  of  supply  considerations,  let  there  be  assumed 
an  existing  supply,  truly,  but  a  supply  fixed  and  limited  in 
volume,  in  the  sense  that  all  sources  of  new  supply  are 
taken  as,  for  the  time  being,  closed. 

Nor  is  this  an  especially  heroic  assumption;  the  eco- 
nomics of  child-trading  approximates  this  case;  and  the 
situation  among  the  reservation  Indians  after  a  general 
issue  of  supplies  is  a  still  closer  approximation.  How  would 
demand  present  itself  under  this  gift-supply  assumption? 
And  how  would  values  adjust  themselves? 

Trading  actually  goes  on  briskly  in  these  cases,  and 
doubtless  would  do  so,  if  confined  entirely  to  barter  pro- 
cesses ;  but  the  barter  problem  has  already  been  sufficiently 
considered,  and,  even  if  capable  of  satisfactory  analysis, 
would  not  afford  an  analysis  serviceable  for  our  existing 


THE  ADJUSTMENT  OF  PRICE  541 

money  economy.  There  is,  therefore,  also  to  be  assumed 
an  existing  medium  of  exchange,  a  price  standard. 

Nor  will  it  greatly  advance  our  problem,  the  determi- 
nation of  the  demand  and  of  the  price  of  any  one  article,  to 
appeal  to  the  proposition,  obviously  true  for  certain  purposes, 
that  the  existing  volume  of  commodities  at  any  time  is  in  one 
aspect  demand,  and  in  the  other  aspect  supply,  and  that 
therefore  any  increase  in  the  total  supply  is  at  the  same 
time  an  increase  in  the  total  demand.  The  problem  in 
hand  is  to  determine  what  amounts  of  money  or  of  equiva- 
lent purchasing  power  are,  under  all  the  conditions  and 
influences  bearing  upon  the  situation,  at  present  held  to  be 
expended  for  any  given  commodity  at  its  various  levels  of 
price — what  purchasing-power  demands  are  now  extended 
toward  the  commodity  in  question.  All  the  different  holders 
of  different  goods,  the  exchange  prices  of  which  are  to  be 
offered  against  the  commodity  under  consideration,  must 
be  assumed  as  having  transferred  their  various  commodity 
holdings  into  the  homogeneous  purchasing-power  medium, 
before  any  one  of  these  possessors  of  commodities  or  any 
one  of  these  commodities  can  figure  as  data  in  the  analysis 
of  the  fixation  of  price.  Our  question  is,  what  money 
demands  center  upon  any  selected  commodity;  we  have  no 
concern  with  demand  and  supply  as  aggregates  in  relation 
to  the  entire  market  for  the  total  of  commodities. 

Each  and  every  individual  in  the  assumed  group  of  five 
persons  will  be  assumed  as  disposed  to  purchase  some  share 
of  the  assumed  fixed  supply,  if  only  the  price  turns  out  to 
be  low  enough  to  attract  him ;  each,  that  is,  represents 
potential  demand.  Individual  A  will  take  one  item  if  the 
price  fixes  itself  at  9;  five  items  if  the  price  is  5;  and  evi- 
dently this  disposition  not  to  give  more  than  5  for  the 
fifth  item,  or  more  than  6  for  the  fourth  item,  etc.,  expresses 
a  situation  which  must  obtain  some  further  expression, 
were  we  to  attempt  the  construction  of  demand  schedules 
for  other  commodities.  We  have,  then,  a  schedule  of  dif- 
ferent purchasing  dispositions  at  different  price  levels, — our 


542  VALUE  AND  DISTRIBUTION 

earlier  schedule  under  a  different  statement;  one  item  pur- 
chasable at  price  9,  three  at  8,  six  at  7,  ten  at  6,  fifteen  at 

5,  nineteen  at  4,  twenty-two  at  3,  twenty-four  at  2,  twenty- 
five  at  I. 

Does  this  complete  our  demand  schedule?  Suppose  a 
certain  number  of  articles  to  be  for  sale ;  at  what  level  will 
the  price  be  adjusted?  Here  we  must  obviously  take 
account  of  two  different  possible  assumptions,  (i)  that  the 
holders  of  the  commodity  will  sell  at  any  price  that  they 
can  get,  (2)  that  there  are  refusal  prices. 

Upon  the  first  assumption,  that  of  a  demand  schedule  or 
curve  expressing  maximum  price  offers  of  9,  8,  8,  7,  7,  7, 

6,  6,  6,  5,  5,  5,  5,  5,  etc.,  ten  items  of  unreserved  supply  can 
be  absorbed  by  the  market  only  upon  terms  of  a  price  as 
low  as  5. 

No  such  result  will,  however,  obtain  under  the  second 
assumption ;  here,  obviously,  the  outcome  must  be  a  dif- 
ferent one  accordingly  as  different  assumptions  are  made 
with  regard  to  the  reservation  prices  set  by  the  various 
sellers.  The  truth  is  that  a  case  falling  within  this  second 
class  is  a  case  where  the  supply  schedule  really  contains 
demand  items;  the  seller  plays  two  roles.  If  two  men,  one 
with  a  price-offer  limit  of  30,  and  other  of  10,  want  to  buy 
a  certain  horse,  for  which  the  owner  will  refuse  anything 
under  20,  there  are  really  three  demand  prices  bearing 
upon  the  horse ;  the  case  is  not  that,  on  the  part  of  the 
seller,  of  a  willingness  to  sell  at  any  price,  in  which  case 
we  should  reckon  only  two  demands,  but  is  rather  like  that 
of  an  auction  with  an  authorized  bidder-in. 

If  now,  together  with  our  original  price-offer  schedule 
of  9,  8,  8,  7,  7,  7,  6,  6,  6,  6,  5,  5,  5,  5,  5,  4,  4,  4,  3, 
3,  3,  2,  2,  I,  it  be  assumed  that  the  ten  supply  items  are 
offered  only  as  subject  to  a  reservation  schedule  expressing 
minimum  prices  of  10,  9,  8,  7,  6,  5,  4,  3,  2,  i,  and  if  also  these 
reservation  prices  be  transposed  to  appear  as  demand  prices 
under  the  demand  schedule,  our  problem  will  then  present 
itself  as  one  with  an  unreserved  supply  of  ten  items  as  over 


THE  ADJUSTMENT  OF  PRICE  543 

against  a  demand  schedule  or  curve  of  lo,  9,  9,  8,  8,  8,  7,  7,  ?>  7> 
6,  6,  6,  6,  6,  5,  5,  5,  5,  5,  5,  4,  4,  4,  4,  4,  3>  3,  3,  3,  2,  2,  2, 
I,  I.  The  price  will  then  adjust  itself  at  the  point  where 
the  market  demand  will  absorb  ten  items  of  supply,  that  is 
to  say,  at  some  price  greater  than  6  and  not  greater  than  7. 

The  manner  of  market  analysis  especially  characteristic 
of  the  Austrian  school  has,  under  the  name  of  the  mar- 
ginal method,  now  established  itself  among  practically  all 
economists,  although  there  remain  different  views  enough 
as  to  the  possible  purposes  which  this  analysis  may  serve. 
"In  isolated  exchange,  exchange  between  one  buyer  and 
one  seller,  the  price  is  determined  somewhere  between  the 
subjective  valuation  of  the  commodity  by  the  buyer  as 
upper  limit  and  the  subjective  valuation  of  the  seller  as 
lower  limit."  ^ 

^Positive  Th-eory   of   Capital,  p.    199. 

No  one  would  be  disposed  to  dissent  further  than  to  remark  that 
Boehm-Bawerk  has  here  shifted  his  subjective-worth  concept  over  into  a 
something  derivative  from  the  comparison  of  subjective  worths — a 
true  subjective  valuation  expressed  in  terms  of  price,  B,  the  seller  of 
the  horse,  and  A,  the  buyer,  work  out  the  price-result  by  higgling. 
But  it  is  worth  while  once  more  to  urge  that  the  case  is  more  complex 
than  it  seems  upon  the  face  of  it.  What  are  these  different  subjective 
valuations  1  A  is  concerned  not  merely  with  the  utility  of  the  horse, 
but  also  with  the  utility  of  what  he  must  let  go  in  order  to  get  the 
horse.  B  likewise  has  really  two  things  in  mind — the  horse  to  be  sold 
and  the  return  therefor  to  be  received.  Evidently,  there  is  present  in 
the  problem  a  medium  of  exchange,  and  tacitly  and  indirectly  present 
a  whole  range  of  commodities  into  which  the  transferred  medium  may  be 
exchanged.  For  ideally  simple  conditions,  the  case  should  be  assumed 
as  one  in  which  B  has  only  horses  for  sale,  A  only  sheep,  and  neither 
A  nor  B  the  disposition,  at  the  same  time  with  the  opportunity,  to 
part  with  the  property  to  be  acquired.  If,  then,  B's  supply  of  horses 
is  such  as  to  make  horses  a  burden  to  him,  while  A  is  equally  over- 
stocked with  sheep,  the  terms  of  exchange  may  be  anything— thirty 
horses  for  one  sheep  or  thirty  sheep  for  one  horse  ;  there  are  no  limits 
but  those  of  skill  in  bargaining.  But,  directly  it  is  assumed  that  each 
finds  in  both  horses  and  sheep  a  utility  for  himself,  there  comes  about 
a  valuation  by  both  A  and  B,  not,  however,  a  valuation  by  B  of  his 
horses  or  by  A  of  his  sheep  in  terms  of  some  unrelated  marginal  useful- 
ness, but  a  comparison  by  B  of  the  marginal  usefulness  of  his  horses 
in  terms  of  the  marginal  usefulness  of  the  sheep  offered,  by  A  of  the 
sheep  in  terms  of  the  horses  offered.  That  is  to  say,  upon  a  basis  of 
one  marginal  utility  for  each  exchanger  there  can  be  no  limit  prices 
between  which  the  exchange  price  must  finally  be  found.      Each  trader 


544  VALUE  AND  DISTRIBUTION 

This  explanation  of  value  is  based  upon  the  assumption 
that,  as  the  items  of  offer  and  demand  become  more  numer- 
ous, the  margin  interval  within  which  the  higgling  process 
may  be  operative  is  constantly  reduced.  A  sufficiently 
minute  gradation  of  both  oft"er  and  demand  is  assumed — so 
near  an  approach  to  infinitesimals — as  to  justify  the  treat- 
ment of  the  selling-price  as  accurately  a  marginal  price  for 
both  demand  and  supply.  Admitting  all  the  necessary 
attendant  conditions,  namely,  that  all  the  commodities  are 
of  equal  desirability,  all  the  competitors  in  the  market 
simultaneously,  and  "that  the  buyers  and  sellers  make  no 
mistakes  about  the  actual  state  of  the  market  such  as  would 
prevent  them  from  really  pursuing  their  egoistic  interest"  "* 
— assuming,  in  short,  a  perfectly  frictionless  market,  this 
may  be  admitted  as  an  accurate  account,  descriptively,  of 
the  market  process ;  but  it  is  another  matter  to  assert  that 
the  point  of  adjustment  expresses  marginal  utilities,  or 
measures  them,  or  is  measured  by  them.  As  we  have  seen, 
two  marginal  utilities  must  be  compared  by  each  marginal 
trader — utilities  must  become  marginal  relative  utilities — 
before  a  trader  can  become  a  marginal  trader.  It  is  still 
another  matter  to  assert  that  these  marginal  traders  are,  as 
against  the  opposing  in-pressing  volumes  of  commodity 
and  of  purchasing  power,  the  causal  facts  determining  the 
ultimate  price  adjustment.  It  is  yet  even  more  questionable 
to  assert  that,  while  the  market  price  coincides  with  the 
price  limits  of  both  marginal  traders,  the  price  is  invariably 
determined  by  the  price  limit  of  only  one — the  buyer.  All 
these  questions  really  resolve  themselves  into  the  one  great 
question.  What  are  the  causative  forces  in  the  market 
adjustment? 

must  be  concerned  with  two  marginal  utilities,  and  must  have  based 
his  subjective  valuation  upon  the  outcome  of  this  comparison.  It  is 
only  upon  these  conditions  that  A  can  set  his  minimum  offer  at  ten 
sheep  for  one  horse,  or  B  determine,  as  his  limit,  to  accept  five  sheep 
for  one  horse,  and  the  price  limits  be  declared  fixed  at  ten  to  one  as 
upper  limit  and  five  to  one  as  lower  limit. 

The  importance  of  the  further  assumption  of  an  exchange  medium 
and  a  surrounding  commodity  market  is  now  sufficiently  evident.  To 
say  that  B  will  accept  fifty  dollars  for  his  horse,  and  that  A  will,  as 
limit,  give  sixty  dollars,  is  to  say  that  B  prefers  as  against  the  utility 
of  the  horse  the  things  which  fifty  dollars  will  purchase,  and  that,  even 
as  against  the  utility  of  the  things  that  sixty  dollars  will  purchase,  A 
prefers  the  utility  of  the  horse. 

*  Positive   Theory,   p.    204. 


THE  ADJUSTMENT  OF  PRICE  545 

The  illustration — quoted  from  Positive  Theory — of 
isolated  exchange  has  already  received  sufficient  examina- 
tion. No  talk  of  determination  of  price  by  margins  or  at 
margins,  but  only  between  margins,  can  be  made  for  this 
case. 

Consider  now  the  illustration  of  competition  confined 
to  the  selling  side.  If  ^  is  the  only  buyer,  with  30  as 
his  price  limit,  and  if  together  with  B,  with  a  minimum 
price  of  10,  there  are  other  items  of  supply,  B^  at  12,  ^3 
at  15,  B^  at  20,  and  5^  at  25,  the  price  must  be  made  at 
somewhere  between  10  and  12  as  the  limit.^ 

This  second  case  gives  little  support  to  the  theory  that 
the  price  adjustment  either  expresses  a  demand  price  or 
is  limited  in  either  direction  by  demand  margins.  Both 
the  upper  and  the  lower  limits  are  fixed  by  offerers'  prices. 

It  appears,  indeed,  that  only  where,  at  a  certain  mini- 
mum of  price  as  set  by  supply,  the  demand  items  out- 
number the  supply  items,  can  a  demand  schedule  furnish 
both  price  limits ;  but  cases  of  this  sort  are  presented  only 
in  the  one-sided  competition  of  buyers : 

"Assume  now  that,  in  addition  to  A-^^  and  A^,  three  other 
buyers,  A^,  A^,  and  A.^,  compete  for  the  horse,  and  their 
respective  circumstances  are  such  that  they  count  the  pos- 
session of  the  horse  equivalent  to  22,  25,  and  28,  respect- 
ively  A^  will  bid  to  the  limit  of  22,  A^  to  25, 

and  A.^  to  28." « 

Thus  at  28  /^i  and  A^  would  close,  so  A^  must  pay  a 
price  somwhere  between  28  and  30. 


TWO-SIDED 

COMPETITION 

J5m> 

ers 

A^  values 

a 

borse  at  30, 

and  would 

buy 

at 

any  pr 

A,      " 

"   28, 

A3      " 

"   26, 

A,      " 

"   24, 

As      " 

"    22, 

At      " 

"    21, 

A,      " 

"    20, 

As      " 

"    18, 

Ao      " 

"    17, 

Azo       " 

"    15, 

"  Positive  Theory,  p. 

201. 

•  Ibid. 

28 
26 
24, 

22 
21 
20 
18 
17 
15 


546 


VALUE  AND  DISTRIBUTION 


Bs 
B, 
Bs 
Be 
B, 


Sellers 
rates  a  horse  at  lo,  and  would  sell  at  any  price  over  lo 


II, 

"  15,    " 

"  20,    " 

"  2li" 
"  25,  " 
"    26,      " 


II 
15 
17 
20 

2li 

25 

26 


"At  any  price  over  20  only  six  horses  are  demanded  and 
five  offered The  solution  becomes  essentially  differ- 
ent when  the  rising  bids  have  reached  the  limit  of  21.  At 
that   price   A^,   is   compelled   to   cease   bidding,    and   there 

are   now  only   five   sellers   against  five  buyers The 

bargain  may  be  concluded  at  the  price  of  21."  But  at 
the  price  of  21^  "there  would  be  a  sixth  possible  seller  in 

the    form    oi    B^ The    limits    within    which    the 

price  must  necessarily  be  determined  are  narrowed  to  21 
and  21^.'"^ 

But  meanwhile  observe  that,  though  in  an  isolated 
exchange,  B  and  A  get  at  the  terms  of  sale  by  higgling, 
and  though,  in  the  case  of  the  one  seller  B,  in  face  of  ^^ 
and  Ao,  the  price  is  fixed  by  the  bargaining  of  B  with  A^, 
it  is  a  hazardous  step  to  conclude  that  any  similar  pairing- 
off  can  obtain  under  the  two-sided  competition  of  the  ordi- 

'' Positive   Theory,   pp.    203-206. 

Recasting;  the  problem  so  as  to  make  reservation  prices  appear  in 
the  demand  column,  the  supply  schedule  stands  as  eight  items  for  sale 
without  reservation  as  against  offers  of  10,  11,  15,  17,  17,  18,  20,  20, 
21,  21  >2,  23,  25,  25,  26,  2y,  28,  30.  The  price  outcome  is,  of  course, 
the  same  as  before. 

It  is  worthy  of  note  that  this  view  of  supply  as  having  also  a 
demand  aspect  and  as  leaving  both  the  upper  and  the  lower  price  limit^ 
to  be  furnished  from  the  demand  schedule  affords  scant  comfort  to  the 
demand  school  of  value,  since  it  remains  true  that  the  number  of 
items  in  the  supply  schedule  must  determine  between  which  limit 
pair  of  demands  the  price  shall  finally  settle.  Otherwise  than  by 
somehow  showing  that  the  volume  of  the  supply  schedule  is  itself  to  be 
traced  back  to  demand  forces  and  explained  by  them,  the  demand  point 
of  view  fails  to  make  out  its  case. 

But,  in  whichever  manner  the  problems  are  analyzed,  it  is  evident 
that  no  warrant  has  yet  been  given  for  asserting  the  paramount  impor- 
tance of  either  demand  or  offer  in  the  determination  of  price.  Admit- 
ting that  for  cases  where  infinitesimals  have  excluded  higgling,  "we 
now  see  that  every  market  price  is  a  marginal  price"  (Positive 
Theory,  p.  209),  the  existence  and  origin  of  any  one  determining  force 
must  still  be  held  in  doubt.  To  justify  the  Austrian  interpretation, 
supply  has  yet  to  be  resolved  into  demand. 


THE  ADJUSTMENT  OF  PRICE  547 

nary  market,  no  matter  how  idealized  may  be  assumed  to 
be  the  conditions.  It  can  hardly  be  true  that,  in  order  to 
reach  the  price  adjustment,  any  particular  individuals 
must  get  tog-ether ;  yet  our  rationalized  schematic  narrative 
has  it  that  the  least  anxious  actual  buyer  who  would  pay 
22,  if  necessary,  and  the  least  anxious  actual  dealer  with 
his  limit  of  20 — the  marginal  bargainers — arrange  the 
price  adjustment  through  their  skill  of  fence  in  the  bar- 
gaining process.  They  certainly  need  not ;  all  that  the 
perfect  market  assumes  is  that  such  a  price  be  reached  as 
shall  leave  no  one  having  the  willingness  to  sell  below  the 
price  to  cry  his  wares  without  a  purchaser,  and  as  shall 
leave  unsupplied  no  purchaser  who  would  yet  take  the 
commodity  at  any  slightest  fraction  above  the  price  estab- 
lished. The  price  which  will  fulfil  these  conditions  may 
be  established  in  no  matter  what  wise ;  it  is  sufficient  that  it 
will  not  be  disturbed.  The  chances  are  evidently  thousands 
to  one  that  the  marginal  traders  will  not  get  together  to 
higgle,  and  it  is  by  no  means  clear  that  these  are  the  traders 
of  especially  marked  disposition  to  higgle.  That  they  are 
the  most  indifferent  of  all,  in  point  of  the  volume  of  quasi- 
rents  at  stake,  may  not  indeed  fairly  imply  that  they  are  the 
least  interested  in  the  particular  penny  or  two  to  be  con- 
tended for ;  but  in  actual  fact  not  the  number  of  pennies  at 
stake,  but  the  kind  of  people  playing  for  these  pennies,  will 
mostly  determine  who  will  do  the  higgling  and  how  much 
higgling  will  be  done.  Women  of  the  shopping  and  bar- 
gain-counter mania  deserve  especial  attention  in  this  con- 
nection. There  is  no  sufficient  reason  for  supposing  them 
to  be  purchasers  at  or  near  the  margin  of  indifference. 

And,  even  were  it  true  that  the  traders  nearest  the 
margin  chiefly  do  the  higgling,  their  activity  could  be 
effective  in  setting  the  last  touches  to  the  price  adjustment 
only  so  far  as  they  were  assumed  not  to  be  marginal.  It 
is  of  the  essence  of  the  theory  that  in  a  perfect  market 
higgling  is  not  a  force  to  modify  the  outcome ;  and,  even 
upon  the  assumption  of  an  inter-marginal  area,  it  could  be 
only  within  this  narrowest  of  limits  and  as  putting,  so  to 
speak,  a  fine  edge  on  the  price  that  bargaining  could  avail 
to  fix  the  terms  of  the  exchange.  Certainly,  in  the  broad 
view,  these  marginal  or  quasi-marginal  bargainers  are  the 
results  of  the  price  limit,  and  not  the  cause  of  it.  The 
marginal  item,  whether  of  demand  or  supply,  differs  from 
any  other  item  only  that  through  it  as  marginal  increment 


548  VALUE  AND  DISTRIBUTION 

a  determination  may  schematically  be  made  of  just  what 
effect  it,  or  any  other  single  item,  has  had  upon  the_  price 
adjustment,  measurement  being  made  from  the  point  at 
which  all  the  other  forces  in  the  market  would  otherwise 
have  left  the  price.  Not  to  the  soldier  who  fires  the  last 
gun  is  the  victory  to  be  accounted,  nor  is  the  smallest  boy 
who  touches  off 'a  fire-cracker  to  be  held  responsible  for 
the  Fourth-of-July  hubbub.  If  there  is  truly_  a  marginal 
buyer,  the  marginal  price  must  coincide  with  his  valuation ; 
but  neither  the  point  of  adjustment  nor  the  buyer  at  this 
point  is  the  determinant  of  price.  This  buyer  is  the  least 
forceful  among  all  the  buyers.  True  it  is  that,  if  he  were 
not  in  the  case,  the  price  would  have  been  other;  but  so  is 
this  true  of  all  other  buyers.  The  marginal  demand  is  one 
among  the  whole  number  of  demands,  and  as  such  has  its 
part  in  the  resulting  adjustment;  but  it  is  the  entire  demand 
in  equilibrium  with  the  entire  supply  which  gives  this 
market  adjustment.  Almost  as  well  talk  of  the  child  who 
chases  the  wave  up  and  down  the  shingle  as  fixing  the 
wave- front. 

For  most  purposes  the  marginal  traders  are  observers. 
It  is  true  that  their  added  weight  in  the  market  may 
move  the  price  from  one  margin  to  another,  but  the  basis 
on  which  they  build  or  to  which  they  add  is  made  by 
thousands  of  other  demands  in  face  of  thousands  of 
offers.^ 

*  That  this  needs  saying  is  evident  not  merely  from  numberless 
cases  of  careless  statement — some  of  the  present  writer's  among  them 
— but  from  cases  where  the  marginal  doctrine  is  made  the  basis  of 
really  absurd   conclusions  : 

"At  first  sight  it  may  appear  strange  that  so  few  persons,  and 
those  so  little  conspicuous,  should  decide  the  fate  of  the  whole  market; 
but  on  closer  examination  this  will  be  found  quite  natural.  If  all  are 
to  exchange  at  one  market  price,  the  price  must  be  such  as  to  suit 
all  exchanging  parties :  and  since  naturally  the  price  which  suits  the 
least  capable  contracting  party  suits,  in  a  higher  degree,  all  the 
more  capable,  it  follows  quite  naturally  that  the  relations  of  the  last 
buyer  whom  the  price  must  suit,  or,  as  the  case  may  be,  the  first  buyer 
whom  it  cannot  suit,  afford  the  standard  for  the  height  of  price." — 
Positive  Theory,  p.  213. 

"We  may  go  a  little  farther,  and  affirm  that,  so  far  from  the 
money  demand  proper  being  the  regulating  demand,  in  the  adjustment 
of    ratios    between    the    precious    metals    and    other    commodities    that 

money    demand    can    hardly    ever   be    the    regulator [It]    can 

hardly  ever  be  that  last  margin  of  demand  to  which  the  last  margin  of 
supply  is  adjusted,  and  by  which  the  ratio  of  exchange  between  the 
precious  metals  and  other  articles  will  be  finally  settled," — Giflfen, 
The  Case  against  Bimetallism,   pp.   94,  95. 


THE  ADJUSTMENT  OF  PRICE  549 

The  fact  appears  to  be  that  the  ,  marginal  method  of 
analysis  is  of  very  limited  application  as  an  account  of  the 
concrete  facts  of  industry,  and  is  of  even  less  value  as  a 
statement  of  causal  sequences.  As  a  thoroughly  rational- 
ized statement  of  that  which  never  remotely  approaches 
the  rational — as  a  formulation  of  the  logic  implicit  in  the 
market — it  has,  in  some  directions,  an  important  function 
in  economic  investigation ;  but  it  says  merely  that,  with  the 
various  occasions  of  friction  eliminated,  with  things  differ- 
ent in  degree  merely,  the  forces  and  tendencies  of  the  mar- 
ket would  work  out  in  conformity  with  the  illustrative 
scheme.  It  has  nothing  to  say  as  to  the  nature  or  causal 
interplay  of  these  forces. 

This  is  in  no  sense  to  deny  the  important  service  of  the 
marginal  method,  but  rather  to  define  and  limit  its  pur- 
pose. Onlv  by  such  close  analysis  of  what  is  characteristic 
in  marginal  relations  does  the  ready  and  sensitive  response 
of  value  to  market  influences  become  intelligible,  or  a 
rational  and  detailed  account  of  the  ultimate  relations  of 
demand  and  supply  to  each  other,  and  of  both  to  market 
prices,  become  possible. 

Precisely  as  demand  at  any  given  time  must  include  all 
the  purchasing  dispositions  in  possession  of  money  or  of 
equivalent  purchasing  power  translated  into  terms  of  money 
— credits,  deposit  rights,  goods  appraised  in  terms  of  money 
— so  the  supply  schedule,  in  whatever  manner  it  is  formu- 
lated, must  allow  for  all  the  commodities  for  sale  on  any 
money-price  terms.  As  an  intermediate  step  in  the  elucida- 
tion of  the  price  problem,  supply  no  more  than  demand  is 
to  be  formulated  as  a  derivative  from  the  price  adjustment. 

And  here  we  may  stop  to  question  whether  anything  is 
really  gained  by  distributing  into  the  demand  schedule 
the  demand  elements  hidden  in  supply.  Is  the  price  adjust- 
ment thereby  made  either  more  intelligible  or  easier  of 
manipulation  ? 

Probably  not ;  no  preference  is  urged ;  it  is  only  when, 
presently,  under  cost-of-production  influences,  the  supply 
volume  of  any  particular  commodity  is  to  be  explained,  or 
when  an  analysis  is  attempted  of  the  influences  bv  which 


550  VALUE  AND  DISTRIBUTION 

tlie  volume  of  supply  will,  with  passing  time,  be  modified, 
that  theoretical  sigriificance  attaches  to  the  proposed  recast- 
ing of  the  demand  and  supply  schedules. 

But  it  remains  true  that,  speaking  generally  of  modern 
entrepreneur  production,  goods  when  once  produced  are 
sold  for  what  they  will  bring ;  which  really  amounts  to  say- 
ing that  in  the  main  the  practical  significance  of  all  reserva- 
tion prices  must  be  sought  in  the  field  of  costs. 

For  it  now  becomes  necessary  to  attempt  some  account 
of  the  bearing  of  cost-of -production  influences  upon  supply. 
All  influences  tending  to  restrict  the  relative  output  of  any 
commodity  express  themselves  in  the  entrepreneur  compu- 
tation as  cost  influences  of  the  most  unquestionable  sort; 
and  chief  among  these  are  the  value-productive  opportuni- 
ties open  in  other  lines  of  production. 

But,  in  point  of  fact,  inasmuch  as  cost  of  production  is 
purely  a  computation  of  the  individual  entrepreneur,  there 
is  hardly  any  limit  to  the  influences  that  may  bear  to  cancel 
or  limit  his  production ;  but  each  such  influence,  by  the 
very  fact  that  it  is  supply-restricting,  is  the  basis  or  the 
expression  of  a  cost;  whether  it  applies  to  one  or  to  many 
or  to  all  lines  of  product  is  irrelevant  to  the  present  pur- 
pose. No  individual  entrepreneur  knows  or  cares  as  to 
the  effect  upon  the  relative  volumes  of  different  supplies. 
Possibly  enough,  the  hazard  or  the  tedium,  or  the  ill  repute, 
or  the  time  discount,  or  the  rent,  may  in  other  industries  be 
equally  as  serious  burdens  as  in  the  line  of  production 
pursued ;  but  there  is,  in  any  event,  the  alternative  of  non- 
production.  The  only  cost-of-production  question  is,  then, 
what  remuneration  must  be  received  to  maintain  the  out- 
put. This  remuneration  must  be  sufficient  to  keep  the  pro- 
ducer from  deserting  his  line  of  production  for  another 
line,  or  from  retiring,  entirely  or  in  part,  to  leisure.  Thus 
the  cost  margin  may  be  one  of  change  of  product  or  of 
restriction  of  product  or  of  retirement.  But,  in  any 
case,  cost  is  the  money  statement  of  the  necessary  compen- 
sation. 


THE  ADJUSTMENT  OF  PRICE  55^ 

Superficially  viewed,  there  is,  however,  apparent  force  in 
the  doctrine  that  all  such  burdens  or  expenses — if  any  such 
there  are — as  are  common  to  all  industries,  could  be  omitted 
from  cost  computations,  not  as  excluded  from  cost,  but  as 
irrelevant  to  relative  costs ;  for,  after  all,  it  is,  in  the  broad 
view,  true  that  cost  as  bearing  upon  value  must  be  cost  in 
the  relative  sense.  And  it  must  be  admitted  that  it  would 
be  possible  to  regard  entrepreneur  qualities,  capacities, 
conditions,  and  preferences  as  the  sole  variant  influences 
upon  cost,  taken  in  this  relative  sense,  were  it  not  for  the 
fact  that  the  different  industries  vary  greatly  in  their  tech- 
nique in  respect  to  the  relative  call  for  one  productive 
agent  or  class  of  agents  as  against  another.  So  were  all 
industries  alike  in  this  respect,  or,  so  far  as  the  technology 
of  production  were  concerned,  were  the  different  agents  and 
instruments  practicably  interchangeable  at  their  established 
price  levels,  so  that  no  agent  or  instrument  could  be  in 
relatively  short  supply,  their  could  remain  no  basis  for 
variations  in  the  relative  costs  of  commodities,  other  than 
through  such  differences  as  depended  strictly  upon  dif- 
ferences in  entrepreneurs. 

As  the  outcome  of  this  discussion — more  or  less  repeti- 
tious,— we  arrive  at  a  clearer  view  of  the  relation  of  costs 
to  value  and  of  the  ultimate  determinants  of  value  as 
expressing  themselves  through  costs.  Taking  entrepre- 
neurs as  they  are,  with  all  their  differences,  and  as  competi- 
tively operating  under  given  and  common  conditions  of 
technological  development,  and  placing  these  entrepre- 
neurs, with  their  different  abilities  and  adaptations,  over 
against  the  conditions  of  human  needs  and  wants  on  the 
one  side,  and  over  against  the  existing  supply  of  instru- 
ments and  the  actual  limitations  and  conditions  upon  the 
supply  of  these  instruments,  on  the  other  side,  we  have  a 
full  explanation  for  the  relative  volumes  of  products  and 
for  their  respective  market  prices.  Cost  of  production  is 
merely   the   entrepreneur   computation   under   which   these 


552  VALUE  AND  DISTRIBUTION 

underlying  forces  and  conditions  exert  their  determinative 
influence  upon  the  relative  volumes  of  products. 

Cost,  then,  is  to  the  entrepreneur  something  more  than 
a  return  for  the  outlays  of  production,  often  something 
more  also  than  a  personal  justification  for  activity  as 
against  idleness.  The  producer  must  in  most  cases  also 
justify  his  occupation  against  any  other  line  of  gainful 
activity  open  to  him.  As  bearing  upon  price,  cost  is,  we 
repeat,  nothing  more  than  the  inducement,  expressed  in 
money,  necessary  to  the  bringing-forth  of  product.  The 
search  for  the  maximum  price  remuneration  for  the  pro- 
"ductive  energies  and  opportunities  at  one's  disposal  dis- 
closes what  is  commonly  the  most  important  element  in 
cost  in  any  particular  line  of  production. 

Or,  again,  cost  may  be  stated  as  the  refusal  price 
below  which,  as  a  margin,  the  advantages  of  some  alterna- 
tive of  production  or  of  recreation  will  tip  the  scales  of 
choice.  Taking  account,  in  this  refusal  price,  of  its  most 
important  constituent,  the  relative  advantages  of  some 
other  line  of  employment,  the  compensations  held  forth  for 
the  ministry  to  other  demands,  supply  takes  on  a  distinctly 
dynamic  aspect;  it  is  no  longer  an  inert  or  passive  fact  as 
the  recipient  of  demand,  and  as  having  the  capacity  to 
affect  value  only  as  it  satiates  demand.  It  has  rather  the 
aspect  of  a  resistance,  since  it  is,  in  large  part  and  in  the 
relative  computation,  almost  solely  the  expression  of 
demands  in  other  directions. 

If  it  be  granted  that  the  supply  schedule  is  equally  a 
demand  schedule,  the  futility  of  the  contest  between  the 
utility  school  and  the  cost  school  becomes  apparent.  Each 
of  the  contestants  will  have  to  make  room  for  the  other, 
with  both  elements  recognized  as  dynamic  in  precisely  the 
same  sort.  Relatively  speaking,  however,  the  demand 
schedule  is,  doubtless,  a  fixed  one.  However  fully,  then, 
the  primal  and  causal  nature  of  demand  be  recognized, 
there  is  much  to  say  for  the  view  that,  given  man  as  he  is, 
with   his  equipment  of  desires   and   tastes  and  habits  and 


THE  ADJUSTMENT  OF  PRICE  553 

customs,  modifications  in  price  are  most  profitably  studied 
from  the  point  of  view  of  variations  in  the  supply  term. 
Diminishing  relative  costs  now  here,  now  there,  are  the 
characteristics  of  a  progressive  economy;  the  proximate 
causes  of  modifications  in  value  are,  therefore,  to  be  found 
in  those  changes  of  productive  processes  which,  by  dimin- 
ishing the  relative  cost  of  particular  commodities,  expand 
their  supply.  A  better  process  implies  simply  that  per 
unit  of  product  it  is  now  necessary  to  divert  a  smaller 
total  of  productive  forces  from  other  lines  of  production. 
Prices  fall  until  the  rising  curve  of  product  cuts  the  falling 
curve  of  price  at  a  new  equilibrium  point  of  compensations. 
Productive  energies  and  the  derived  remunerations  dis- 
tribute themselves  in  view  of  the  marginal  urgency  of 
the  different  demands.  But  the  more  clearly,  then,  is  it  an 
inadequate  formulation  to  say  that  the  market,  having 
become  overstocked  at  the  old  price,  the  increased  supply 
makes  it  necessary  to  make  sale  connections  with  wants  of 
lower  intensity — that  the  larger  supply  has,  so  to  speak, 
uncovered  lower  levels  of  demand,  so  that  the  market  price 
is  still  the  marginal  demand  price  of  the  newly  attracted 
purchasers.  Doubtless  so  it  is,  but  it  is  equally  the  mar- 
ginal supply  price.  Neither  the  relative-marginal-utility- 
demand  items  nor  the  marginal-utility-supply  items  can  be, 
either  alone  or  in  conjunction,  taken  as  fixing  value,  but 
only  as  commensurate  with  value. 


CHAPTER  XXVI 
DISTRIBUTION 

Fundamental  to  all  problems  of  costs,  and,  indeed,  to  all 
aspects  of  distribution,  is  the  problem  of  the  fund  or 
quantity  of  goods  to  be  distributed.  What  is  the  dis- 
tribuendum,  the  group  or  social  dividend? 

Suppose  Farmer  A  to  have  succeeded  during  the  year 
in  covering  his  living  expenses  and  to  have  added  $500  to 
the  value  of  his  farm;  what  is  his  income,  $500  or  $1,000? 

Mr*  Cannan  stands  for  the  view  that  within  income 
must  be  included  (i)  the  things  enjoyed,  (2)  the  increase 
made  in  personal  capital,  the  $1,000  solution.^  Professor 
Fisher,  on  the  contrary,  insisting  that  income  is  strictly  to 
be  distinguished  from  capital — income  being  taken  to  consist 
purely  of  psychic  services,  the  flow,  while  capital  stands 
solely  for  the  fund  of  possessions  from  which  this  flow 
is  derived — holds  that  the  $500  of  improvement  added  to  the 
farm  is  really  not  present  income  but  rather  the  postpone- 
ment of  present  income,  and  that  the  increase  in  the  value 
of  the  farm  is  merely  the  present  worth,  the  capitalized 
value,  of  a  prospective  increase  in  income. - 

For  the  purposes  of  the  present  discussion,  Professor 
Fisher's  view  appears  to  be  the  better  one;  human  affairs 
may,  if  one  likes,  be  regarded  in  two  aspects,  on  the  one 
side,  the  appetitive  side,  an  analysis  of  human  desires  for 
valuable  services,  on  the  other  side,  an  investigation  of  the 
productive  processes  and  the  distributive  forces  under 
which  these  desires  reach  their  more  or  less  of  satisfaction. 
Consumption  is  the  final  goal  of  production,  psychic  income 
(utility)  the  ultimate  significance  of  the  production-distribu- 
tion process.   If  by  drouth  or  fire  or  murrain  and  before  any 

^Economic  Journal,  Vol.  VII,  p.  284. 
^Ibid.,  pp.   534,   535- 

554 


DISTRIBUTION  555 

enjoyment  had  accrued,  our  capitalizing  farmer  had  seen 
his  improvements  canceled,  they  could  not  be  held  to  have 
furnished  income,  in  any  sense  with  which  ultimately  the 
distribution  problem  is  concerned. 

But  how  about  the  products  of  the  farmer's  kitchen 
garden,  making  part  of  his  $500  of  "living"  supplies,  or 
about  the  eggs  and  butter  produced  and  consumed  upon  the 
farm,  and,  generally,  about  all  those  commodities  and  serv- 
ices which  might  have  been,  but  were  not,  marketed? 

Or  how  about  the  fresh  air  breathed  and  the  fine  views 
commanded  and  the  neighborhood  privileges  enjoyed  upon 
the  farm — all  facts  controlled  and  appropriated  under  the 
right  and  title  of  the  farm  ownership,  and  all  in  their  share 
contributing  to  its  command  of  those  rental  incomes,  of  the 
long  series  of  which  the  value  of  the  farm  stands  as  the 
capitalized  present  worth?  Is  it  necessary  that  a  potentially 
marketable  fact  pass  through  the  market  crucible,  before 
this  fact  can  stand  as  an  item  in  the  social  distrihuendum? 

And  what  shall  be  said  of  the  housewifely  activities  of 
the  women  folk  at  home,  their  errand-goings  and  slipper- 
bringings  and  nurselike  ministrations?  Are  these  to  be 
accounted  unproductive  merely  by  the  fact  that  they  are 
not,  in  any  usual  sense,  paid  for?  And  if  productive,  what 
is  the  relation  of  the  product  to  the  national  dividend? 
What  also  about  the  labor  of  the  domestic  servant?  And 
how  exclude  this,  without  applying  the  same  rule  to  the 
efforts  of  the  actors,  teachers,  and  preachers?  Or  is  the 
line  of  distinction  still  this  one  of  appearance  or  non- 
appearance in  market  exchanges? 

And,  theoretically,  these  are  far  from  being  the  most 
serious  difficulties.  If  it  be  agreed  that,  even  at  the  margin 
of  withdrawal,  work  may  be  pleasurable,  and  yet  be  aban- 
doned at  the  point  where  the  pleasure  of  the  activity, 
plus  the  pleasure  from  the  product,  is  outweighed  by  the 
advantages  attaching  to  other  pleasant  work  or  to  leisure, 
where,  then,   shall  be  drawn  the   line  between  work  and 


555  VALUE  AND  DISTRIBUTION 

play?  Shall  it  be  said  that  anything  is  work  which  is  done 
with  any  slightest  regard  to  the  resulting  product,  and  that 
only  that  is  play  which  is  done  purely  and  solely  for  the 
very  joy  of  the  activity?  This  is  probably  the  more  com- 
mon formulation;  but  what  is  product  for  the  purposes  of 
the  case  in  hand?  If  one  hires  someone  to  play  the  violin 
for  him,  the  activity  of  the  player  is  clearly  productive; 
that  is  why  it  is  paid  for.  And  if  gratuitously  rendered — 
a  gift  of  service — is  the  playing  thereby  to  be  regarded  as 
the  less  a  service  and  the  less  productive?  And  why  is  not 
equally  productive  the  act  of  playing  for  oneself?  Is 
the  distinction  purely  in  the  fact  that  in  tliis  last  case  there 
is  no  external  and  marketable  somewhat?  Or  is  the  dis- 
tinction merely  one  of  the  degree  of  roundaboutness  of  the 
path  by  which  tlie  service  arrives? 

Surely  if  one  spend  some  days  in  making  a  violin,  later 
to  be  used  for  one's  self-amusement,  the  process  of  making 
must  be  accounted  productive.  Is  the  distinction  then 
between  the  productive  and  the  unproductive  one  of  exter- 
nality of  result?  or  of  roundaboutness?  If  one  apply  him- 
self to  grievous  study  in  preparation  for  the  making  of 
violins,  this  must  be  regarded  as  productive  effort,  unless, 
indeed,  the  denial  rest  upon  the  fact  that  as  yet  there  are 
no  external  results,  the  study  being  regarded  rather  as  a 
preparation  for  producing  than  as  actual  production,  and 
the  skill  rather  as  producer  than  as  product,  and  its  remun- 
eration rather  as  wages  than  as  interest. 

But  would  it  at  all  matter  for  the  purpose,  were  the  study 
a  preparation  not  to  make  violins  for  oneself,  but  to  play 
violins  to  oneself?  In  economic  usage,  it  is  difficult  to 
call  this  sort  of  preparation  zuork,  but  in  any  lay  sense  of 
the  term,  difficult  to  call  it  anything  else.  But,  clearly 
enough,  no  product  has  yet  manifested  itself,  of  a  sort  to 
rank  as  a  psychic  income,  or  to  function  as  rent  or  hire  or 
wage  with  relation  to  the  aggregate  product  to  be  dis- 
tributed. It  seems,  then,  that  not  all  desirable  results  fall 
within  the  dividend  concept. 


DISTRIBUTION  557 

Possibly  another  line  of  approach  to  the  problem  will 
better  serve.  Leisure  and  recreation  cannot  altogether  be 
excluded  from  the  field  of  economic  reasoning,  since  they 
rank  as  among  the  costs  setting  a  limit  to  productive  activ- 
ity ;  not  merely  the  outlays  of  production,  but  the  pains  of 
production,  and  likewise  the  pleasure  displacements  of  pro- 
duction, are  facts  affecting  the  money  recompense  required 
to  induce  production.  That  is  to  say,  recreation  wants  are" 
value-affecting  influences  to  be  taken  into  account  in  the 
computation  of  costs. 

All  this,  however,  idoes  not  involve  the  inference  that, 
from  the  market-value  point  of  viezv,  recreation  is  produc- 
tive. Recreation  never  looks  toward  marketable  product, 
and  is  therefore  irrelevant  to  market  value,  otherwise  than 
in  this  aspect  of  cost.  In  the  market-value  sense,  at  any 
rate,  it  is  not  productive. 

But  how,  from  the  individual  point  of  view,  say,  in  the 
Crusoe  reckoning?  Shall  basking  in  the  sun  be,  from  this 
point  of  view,  accorded  productivity,  even  though  it  be  a 
productivity  without  activity?  Plainly,  the  result  is  a  satis- 
faction, a  utility,  a  psychic  income.  What  does  it  signify  in 
Crusoe's  economic  life — his  zvirthschaftlichen  Leben — 
whether  or  not  somewhere  in  the  process  an  external  fact 
presents  itself?  The  truth  seems  to  be  that  basking  in  the 
sun  and  every  ordinary  sort  of  play  can  fall  short  of  eco- 
nomic quality  not  by  any  test  of  externality,  but  only  by  the 
fact  that  free  goods  are  not  economic  goods ;  they  need  no 
economizing.  In  the  economic  sense,  the  production  of 
free  utilities  is  not  production  at  all.  So  if,  aside  from  any 
market  aspect  of  the  case,  violin-making  were  an  enjoyable 
activity — a  costless  process,  it  could  not  become  economically 
productive  by  the  mere  fact  that  a  desirable  thing  resulted 
from  it,  any  more  than  the  playing  of  the  violin  for  self- 
amusement  becomes  productive  by  the  mere  fact  that  it 
gives  amusement.  No  matter  how  greatly  prized  mud 
pies  may  possibly  be  when  once  they  are  made,  they  are  not 
thereby  economic  goods — and  this,  simply  because  they  are 


558  VALUE  AND  DISTRIBUTION 

free — costless — goods;  one  may  have  them  to  the  limit  of 
his  desires,  exempt  from  all  conditions  of  burden. 

But  again,  what  if  the  case  be  one  where  the  recreation 
is  really  appreciated  as  a  costly  thing,  as  displacing  some 
valuable  product  which,  but  for  the  overbalancing  claims 
of  recreation,  would  have  been  produced?  In  this  case, 
the  recreation  must,  it  seems,  be  accepted  as  a  productive 
fact ;  the  resulting  good  is  no  longer  a  free  good  but  a  good 
obtained  on  terms  of  conscious  sacrifice.  Many  a  man 
foregoes  an  outing,  not  solely  as  a  question  of  the  expense 
of  the  trip,  but  in  part  because  of  the  attendant  suspension 
of  earnings. 

And  surely  the  pleasure  that,  in  any  way,  one  pays  for 
has  a  value;  it  is,  indeed,  the  essential  characteristic  of 
all  valuable  psychic  income  that,  in  some  sort,  it  costs  to 
get  it. 

We  conclude,  then,  that  much  that  is  called  play,  and 
much  that  is  ignored,  either  as  unproductive  or  as  irrele- 
vant to  market-value  computations,  must,  in  the  individual 
psychology,  be  held  to  be  productive,  and  that  only  such 
activities  are,  in  the  individual  reckoning,  unproductive  as 
are,  in  the  actual  thought  of  the  individual,  held  to  be 
costless. 

This  conclusion  receives  corroboration  from  the  fact 
that  where  another  plays  the  violin  for  your  pleasure,  and 
yet  does  it  without  charge,  the  naive  common-sense  would 
rank  the  case  as  neither  more  nor  less  productive  than 
is  one's  own  activity  for  one's  own  amusement. 

But  to  declare  an  activity  productive,  whether  indi- 
vidually or  socially,  is  not  precisely  to  establish  its  product 
as  an  item  in  the  social  distribuendum.  Not  all  product  is 
implicated  in  the  distributive  process ;  there  is  much  pro- 
ductivity against  the  result  of  which  no  competing  and  con- 
flicting claims  on  behalf  of  co-operating  productive  factors 
can  attach,  or,  at  all  events,  do  attach,  and  which  has  no 
other  relevancy  to  the  distributive  problem  than  is  implied 


DISTRIBUTION  559 

in  the  fact  that  the  production  of  it  may  have  had  some 
bearing  to  restrict  the  quantum  of  distributive  goods.^ 

Regarding,  then,  the  social  dividend  as  made  up  solely 
of  products  ripe  for  consumption,  and  as  including  not  all 
of  these,  but  only  such  as,  either  by  the  conditions  of  their 
production  or  by  the  manner  of  their  consumption,  come 
to  be  involved  within  the  distributive  process,  we  are  now 
concerned  to  note  that  all  consumption  goods  ripening  to 
service  within  the  economic  process,  as  distinguished  from 
crime,  or  warlike  foray,  or  other  non-market  predation, 
fall  to  their  recipients  under  the  guise  of  economic  income. 
But  not  all  incomes  are  received  by  title  either  of  inde- 
pendent production  or  of  co-operative  contribution  to  pro- 
duction. If  we  are  to  render  any  adequate  account  of  the 
forces  determining  the  apportionment  of  the  social  distrihu- 
endum,  it  will  be  necessary  to  explain  the  actual  distribution 
of  purchasing  power  in  society.  This  the  productive- 
distributive  process  is  adequate  to  do  only  in  part.  And 
productivity  of  income  is  something  other  and  more  inclu- 
sive than  mere  technological  productivity,  present  or  past. 
Goods  for  consumption  are  acquired  through  the  posses- 
sion and  offer  of  current  purchasing  power ;  and  this  in 
turn  may  have  been  acquired  by  inheritance,  by  gift,  by 
speculation,  by  gambling,  by  stealing,  as  well  as  by  title  of 

^  It  would  be  hard  to  decide  whether  the  net  result  of  this  discus- 
sion is  concurrence  in  the  prevailing  doctrine  or  divergence  from  it. 
So-  far  as  the  present  writer  is  aware,  surprisingly  small  thought  has 
been  directed  to  making  the  social-dividend  concept  precise.  The  dis- 
cussions of  Cannon,  Fisher,  and  Fetter  bearing  upon  the  concept  of 
income  are  both  pertinent  and  illuminating  for  the  purposes  of  the 
problem  ;  and  yet — as  it  seems  to  this  writer — the  social  dividend  is 
something  appreciably  smaller  than  the  aggregate  of  all  individual 
incomes.  Smart  {The  Distribution  of  Income,  chap,  xi)  has  discussed 
with  great  acuteness  some  aspects  of  the  question,  and  concludes  not 
only  that  the  work  of  the  housewife  is  productive,  as  it  surely  is, 
but  that  the  product  is  to  be  included  within  the  social  dividend.  It 
is,  then,  evident  that  the  view  here  taken  goes  farther  than  the 
prevailing  opinion  in  extending  the  notion  of  productiveness,  at  the 
same  time  verging  toward  extreme  restriction  in  deciding  what  share 
of  the  aggregate  product  is  to  be  included  in  the  distribuendum. 


560  VALUE  AND  DISTRIBUTION 

having  produced,  or  of  having  helped  produce,  a  valuable 
commodity.  For,  in  truth,  not  merely  the  distrilmtion  of 
the  landed  and  other  instrumental,  income-commanding 
wealth  in  society,  but  also  the  distribution  of  general  pur- 
chasing power  and  of  rights  to  wield  and  direct  the  appli- 
cation of  general  purchasing  power,  are,  at  any  moment  in 
society,  to  be  explained  only  by  appeal  to  a  long  and  com- 
plex history,  a  distribution  resting,  no  doubt,  in  part  upon 
technological  value  productivity,  past  or  present,  but  in 
part  also  tracing  back  to  bad  institutions  of  property  rights 
and  inheritance,  to  bad  taxation,  to  class  privileges,  to 
stock-exchange  manipulation,  political  favor,  legislative 
and  administrative  corruption,  pensions,  tolls,  royalties, 
perquisites,  patents,  interest  on  public  loans,  interest  on 
consumption  loans,  and,  as  well,  to  every  sort  of  vested 
right  in  iniquity. 

And  some  of  these  mere  rights  of  tribute  come  to  be 
included  in  the  production  process,  and  to  rank  there 
as  valuable  market  advantage  or  opportunity  to  such  indi- 
viduals as  control  these  rights,  e.  g.,  business  blackmail, 
royalties  on  patents  and  processes,  tolls,  transportation 
impositions,  and  the  like.  But  there  being  no  apparent 
method  of  bringing  this  class  of  facts  within  the  orderly 
sequences  of  economic  law,  we  shall — perhaps — do  well  to 
dismiss  them  from  our  discussion,  merely  stopping,  how- 
ever, to  note  that  the  incomes  upon  them — to  the  extent  that 
these  incomes  are  so  far  vested  as  to  promise  future 
revenues — are  capitalized  under  the  discount  principle,  are 
salable  like  other  acquisitive  goods,  are  wealth  for  all  indi- 
vidual ends  of  gain  or  of  social  prestige,  and  carry  with 
them  the  right  to  participate  in  the  enjoyment  of  the  social 
product. 

But  none  the  less  is  there  a  distribution  by  right  of  pro- 
ductive contribution.  And  under  this  title  must,  among 
other  things,  be  discussed  the  compensations  allotted  to 
human   labor  and   human   supervisory   activity,   as   wages, 


DISTRIBUTION  5^1 

salaries,  and  profits, — to  the  owners  of  instrumental  goods, 
as  rents,  and  to  capital-owners,  as  time  discount  upon 
wealth  in  its  time  aspect. 

But  in  order  that  the  difficulty  of  the  distribution  prob- 
lem be  not  exaggerated  or  its  importance  disparaged, 
recourse  must  be  had  to  the  principle  that  production  pre- 
cedes and  conditions  and  limits  consumption,  and  that 
therefore  the  production-distribution  process  logically  pre- 
cedes and  theoretically  underlies  all  such  other  distribution 
influences  as  have  no  basis  in  productivity  rendered,  and  as 
modify — even  profoundly — the  ultimate  apportionment  of 
consumption  rights.  Interest  received  upon  public  war 
loans  is  of  this  secondary-distribution  sort;  so  pensions, 
sinecure  salaries,  subsidies,  profits  upon  corrupt  contracts, 
and  not  a  few  of  the  secondary  effects  of  taxation. 

The  chief  theoretical  difficulty  in  the  subject  is,  indeed, 
to  draw  the  line  between  this  primary  and  this  secondary 
distribution,  and  to  make  allowance  for  the  mutual  inter- 
actions ;  for  example,  consumption  loans,  by  affecting  the 
supply  of  funds  for  loan  in  productive  directions,  exercise  an 
influence  upon  the  discount  costs  of  production.  Such 
taxation,  also,  as  can  be  appreciated  by  the  contributor  as 
falling  upon  his  productive  process  rather  than  upon  his 
consumption,  are  treated  by  him  as  production  costs.  Taxes 
also  which  burden  a  distinct  line  of  raw  materials  function 
as  cost  items  in  particular  industries.  And  taxes  which 
burden  distinct  lines  of  consumption,  and  thus  disturb  the 
relative  volumes  of  consumption  goods  to  be  marketed,  may 
superficially  appear  to  have  no  further  effect  than  to  redis- 
tribute the  productive  energies  of  society,  but,  nevertheless, 
by  modifying  the  relative  hires  of  productive  agencies,  do 
appreciably  disturb  the  distribution  of  purchasing  power  in 
society.  Privately  achieved  or  publicly  granted  monopolies 
of  production,  patents,  process  royalties,  trade  secrets  of 
method,  and  any  exclusive  control  of  sources  or  of  methods 
of  supply — all  command  rents,  and  thereby  affect  the  dis- 
tribution of  purchasing  power;   and,   on   the  other   hand, 


562  VALUE  AND  DISTRIBUTION 

the  opportunities  and  advantages  paid  for  under  the  form 
of  these  rents  hold  the  same  relation  to  cost  of  production 
as  are  held  by  land  and  other  instrument  differentials  of 
advantage;  these  costs,  in  turn,  are  mostly  passed  along 
under  the  guise  of  enhanced  market  prices,  and  are  ulti- 
mately mainly  a  burden  upon  the  consumers  of  the  goods, 
whereby,  again,  redistributions  of  purchasing  power  are 
initiated. 

Monopolies  or  privileges  of  sale — as  distinguished  from 
those  of  production — function  in  this  regard  like  taxes 
upon  consumption.  Transportation  charges,  whether  justi- 
fiable or  predatory,  also  operate  like  taxes,  and  are  produc- 
tion costs  or  mere  consumption  tribute  accordingly  as  the 
original  incidence  is  upon  production  rather  than  upon 
consumption ;  but  in  either  case  the  final  burden  rests  in 
most  cases  and  for  the  most  part  upon  consumers.* 

The  broad  principle  for  all  problems  of  cost  of  produc- 
tion is,  however,  that  any  outlay  or  sacrifice  for  a  differ- 
ential opportunity,  whether  this  be  a  mere  permit  or  a 
license,  or  be  attached  to  the  possession  of  some  agent  or 
instrument  of  production,  is  a  cost.  For,  as  we  have  seen, 
any  production  cost  is  merely  another  way  of  looking  at 
what  is,  from  another  point  of  view,  a  distributive  share  in 
the  product.  But  that  all  agent  or  instrument  hires  are 
costs  is  far  from  saying  that  they  include  all  costs.  The 
technological  point  of  view,  which  sums  up  costs  as  a  total 

*  From  this  reasoning  if  accepted  as  correct,  applications  of  very 
considerable  significance  may  be  made  to  important  problems  in  the 
theory  of  taxation  and  to  the  general  principles  upon  which  import 
duties  should  be  levied.  So  also  the  merits  of  the  competitive  organi- 
zation of  society  should  therefrom  receive  some  illumination.  But 
all  this  would  be  aside  from  our  main  purpose  of  realistic  description 
and  theoretical  analysis.  It  must  here  suffice  to  note  that  such 
imperfections  as,  from  the  present  point  of  view,  are  incident  to  the 
competitive  system  refer  not  so  much  to  the  processes  and  the  results 
of  the  primary — the  production — distribution,  as  to  the  political  and 
property  institutions  under  which  the  secondary  distribution  takes 
place,  and  to  the  modifications  of  the  primary  distribution  due  to 
reactions  upon  it  from  the  secondary  distribution.  (See  in  this  con- 
nection note,  p.   565.) 


DISTRIBUTION  5^3 

of  wages,  interest,  rent,  and  profits,  is  in  its  general  accept- 
ance little  short  of  astounding;  for  even  if  taxes,  insurance, 
advertising,  and  like  outlays  may  finally  be  traced  to  labor 
or  capital-goods  bases, — which,  by  the  way,  is  not  a  simple 
matter  with,  say,  taxes  to  pay  interest  on  war  debts — it  is,  at 
all  events,  clear  that  these  are  not  outlays  for  labor  or  capital 
as  technological  factors  in  production.  The  tripartite,  or 
any  other  technological  classification  of  productive  factors, 
must  be  especially  misleading  for  purposes  of  the  entrepre- 
neur-cost computation. 

And  once  again  must  it  be  repeated  that  the  mere  fact 
that  cost-distribution  shares  are  received  through  the  entre- 
preneur as  intermediary,  does  not  imply  either  that  no  part 
of  the  entrepreneur  remuneration,  profit,  is  cost,  or  that 
all  of  it  is  cost.  For  it  is  precisely  at  this  point  of  entre- 
preneur remunerations  that  costs  and  distributive  shares 
fail  of  coincidence.  All  of  the  entrepreneur  remuneration 
is  a  distributive  share,  but  only  for  the  marginal  entrepre- 
neur, or  only  for  the  marginal  items  of  each  entrepreneur's 
production,  is  all  of  the  compensation  cost.  All  quasi-rents 
of  entrepreneurship,  all  unnecessary  or  supra-minimum 
profits,  are  distributive  shares  falling  outside  of  costs. 

But  this  does  not  mean  that  all  occupation  or  instru- 
ment-employment differentials  above  the  next  most  attract- 
ive opportunity  are  non-cost  facts  wherever  found.  Cost 
is  an  entrepreneur  reckoning;  the  entrepreneur  knows 
what  hire  in  the  actual  employment  competition  forces 
him  to  pay ;  but  he  cannot  know,  and  he  need  not  care, 
what  hire  in  some  other  employment  the  agent  or  instru- 
ment might  command.  For  competitive  purposes,  occupation 
differentials  are  non-cost  facts  only  for  those  indi- 
viduals who  receive  the  hire  of  them  and  to  whom  it,  at 
the  same  time,  falls  to  compute  costs.  It  is  the  entrepre- 
neur alone  whose  occupation  differentials  fulfil  both  these 
requirements.  The  self-employed  laborer — entrepreneur- 
ship  at  its  simplest — computes  his  costs  as  the  money  state- 


564  VALUE  AND  DISTRIBUTION 

ment  of  his  best  alternative  line  of  conduct,  whether  this  be 
one  of  independent  production,  or  of  wage-earning,  or  of 
leisure.  The  employee  might — but  without  any  bearing 
upon  market  cost  of  production — compute  for  himself  in 
what  degree  his  compensation  was  greater  than  an  equiva- 
lent for  his  pain,  or  greater  than  his  wage  under  another 
employer,  or  in  another  industry.  And  so,  with  equal  irrele- 
vancv  to  any  market-value  problem,  might  the  land-owner 
compute  what  his  rent  as  actually  received  was  greater  ( i ) 
than  that  which  he  himself  could  make  out  of  the  land,  or 
(2)  than  another  in  the  same  line  of  production  would  pay, 
or  (3)  than  some  tenant  in  some  other  line  of  production 
would  pay.  Or  a  collectivist  society  could  properly  com- 
pute as  its  land  cost  of  any  given  product  only  the  dis- 
placed alternative  products.  But  the  entrepreneur  must 
compute  as  his  cost  not  what  he  would  pay  if  he  paid  less, 
but  what  he  does  pay,  as  compelled  thereto  by  all  the  facts 
of  the  situation. 

Land  worth  100  as  wheat  rent  but  only  90  in  its  next 
best  use  would  permit,  for  collectivist  computations,  only 
90  of  cost;  in  a  competitive  society,  this  land  will  pay  its 
owner  in  rent  10  more  than  it  could  command  in  any  other 
line  of  production,  and  may,  under  the  actual  tenant,  pay 
the  owner  i  of  rent  more  than  any  other  tenant  could  or 
would  pay.  But  since  the  land  costs  the  cultivating  tenant 
100  of  rent,  it  is  a  100  cost  for  him. 

This  does  not  carry  the  cost  computation  to  its  closest 
approximation  to  accuracy,  though  even  at  its  closest, 
something,  as  we  have  seen,  must  commonly  be  lacking  to 
the  entire  accuracy  of  the  productive  imputation.  If  the 
actual  renter  at  100  is  conscious  that  he  could,  in  another 
line  of  production,  make  the  land  count  him  for  102  of 
return,  the  while  that  it  is  actually  paying  him  103 
in  wheat,  he  must  compute  against  its  actual  productivity 
of  103  a  cost  not  of  ico,  the  rent  outlay,  but  of  102,  the 
foregone  opportunity.  His  cost,  so  far  as  it  is  a  land  cost, 
is  in  his  best  foregone  alternative;  in  the  case  supposed, 


DISTRIBUTION  5^5 

this  best  alternative  was  not  to  keep  his  money  in  his 
pocket.  The  necessary  price  to  induce  the  production  of 
the  wheat  was  not,  in  point  of  land  cost,  loo  but  102.^ 

Were  all  entrepreneurs,  albeit  of  unequal  abilities,  yet 
equal  in  equipment  of  wealth,  credit,  and  instrumental  goods, 
and  alike  in  adaptation  to  the  equipment  in  hand,  alike  also 
in  relative  adaptation  to  alternate  lines  of  employment, 
all  costs  would  be  equal  in  each  respective  line  of  produc- 
tion, and  no  entrepreneur  more  marginal  than  any  other, 
or  marginal  at  a  different  output  of  commodity  product. 
But,  even  so,  there  would  be  no  warrant  for  expecting  all 
profits  to  fall  to  the  general  wages  level — if  such  a  level 
there  were — unless  it  were  also  assumed  that  all  men  were 
equally  able  and  equally  well  equipped  and  equally  disposed 
to  undertake  entrepreneurship.  With  fluid  and  perfect  com- 
petition among  unlike  entrepreneurs,  instrument  rents  and 
time  discounts  would  be  forced  to  so  high  a  level  that  the  last 
dose  of  expense,  and  each  instrumental  good  employed 
thereunder,  would  be  employed  at  a  rate  of  remuneration 
so  high  as  barely  to  leave  to  the  entrepreneur  an  induce- 

'  The  law  of  costs,  correctly  formulated,  is  applicable  to  all  things 
competitively  produced,  no  matter  how  many  scarcity  goods  may 
enter  into  the  production  process.  In  the  accurate  sense,  the  term 
monopoly  connotes  conditions  of  non-competition,  or,  in  degree,  of 
restricted  competition.  But,  in  any  case,  the  law  has  no  reference  to 
the  underlying  influences  explaining  the  actual  cost  situation  ;  it  takes 
the  situation  as  it  is  without  attempt  to  investigate  the  causes. 

And  even  in  monopoly  conditions  the  cost  law  may,  without  undue 
violence,  be  made  to  cover  the  computation  under  which  a  restriction 
of  output  becomes  advantageous.  The  cost  law  at  its  broadest  indi- 
cates the  point  at  which  product,  or  added  product,  cancels  as  many 
price-measured  facts  as  it  adds  to  selling-price  ;  production  ceases  at 
the  point  at  which  value  costs  are  at  balance  against  value  product. 

The  monopoly  computation  applies  this  principle ;  on  the  credit 
side  of  the  account  is  computed  the  increment  of  product  at  the  new 
level  of  price  attendant  upon  its  production  ;  to  be  charged  against  this 
are  (i)  the  extra  outlays  of  production,  and  (2)  the  loss  in  price 
suffered  by  the  earlier  items  of  product  through  the  addition  of  the 
new  items.  The  point  of  equation  between  the  two  sides  of  the  account 
is  the  limit  upon  production. 

For  cost  purposes,  in  truth,  small  occasion  exists  for  any  extended 
discussion  either  of  monopoly  problems,  or  of  the  relation  of  corporate 


566  VALUE  AND  DISTRIBUTION 

ment  further  to  burden  himself  with  supervision  and 
further  to  increase  the  volume  of  his  product.  But  still 
there  would  exist  no  warrant  for  asserting  the  equality  of 
costs  with  the  aggregate  compensations  of  the  productive 
factors,  in  any  other  sense  than  that  competition  could 
carry  these  compensations  no  higher.  The  distributive  shares 
out  of  the  product  would  be  the  higher  for  all  entrepre- 
neurs,' as  entrepreneur  ability  should  be  scarce  relatively 
to  instrumental  goods  and  to  employee  labor.  Instrumental 
goods  of  different  sorts  would  be  better  paid  relatively  to 
labor  or  to  entrepreneur  ability  accordingly  as  they  were 
respectively  in  limited  supply. 

For  it  is  to  be  remembered  that,  the  demand  for  con- 
sumption good  being  assumed,  the  demand  for  any  instru- 
mental good  or  agent  is  conditioned  by  the  quantum  of 
instrumental  goods  or  agents  adapted  to  co-operate  with 
it  and  unadapted  to  serve  as  substitutes  for  it.  Just 
as  it  is  the  limitation  upon  the  supply  of  productive 
instruments    and    agents    that    makes    value    possible,    so 

organization  to  the  traditional  theory  and  terminology  of  the  science. 
However  important  and,  indeed,  overshadowing  in  modern  business  the 
phenomena  of  the  later  methods  of  business  organization  may  be,  not 
much  interest  attaches  to  them  for  purposes  of  value  theory.  Nor  for 
distributive  theory  does  great  significance  attach  to  the  corporate 
aspects  of  business  organization,  excepting  as  these  are,  in  practical 
affairs,  associated  with  the   monopoly  feature. 

As  to  corporations  purely  and  simply  as  such,  there  is  little 
greater  occasion  for  separate  treatment  than  for  partnerships.  The 
theoretical  aspects  of  the  new  problems  presented  have  already  been 
sufficiently  summed  up  in  an  earlier  examination  of  the  bearing  of 
corporate  organization  upon  the  established  concepts  and  terminology 
of  the   cost-of-production   problem.      (See   note,   p.    98.) 

Monopolies  also  offer  few  difficulties  of  analysis  so  far  as  the 
effects  are  confined  exclusively  either  within  the  field  of  primary 
distribution,  the  cost  and  value  analysis,  or  within  the  field  of  second- 
ary distribution ;  very  often,  however,  this  simplicity  of  effects  is 
not  present. 

Particularly  are  the  activities  of  the  'operator  in  the  field  of 
"high  finance"  difficult  to  distribute  between  the  two  categories  of 
market-value  productivity- — primary  distribution — as  over  against 
predation  or  parasitism — secondary  distribution. 

The  activities  of  the  lace-weaver,  the  bonnet-trimmer,  the 
diamond-polisher,    the    patent-medicine    manufacturer,    the    clown,    and 


DISTRIBUTION  5^7 

it  is  the  relatively  limited  supply  of  one  class  of 
productive  factors  that  attaches  to  it  a  high  remun- 
eration relatively  to  the  co-operating  factors.  The  ultimate 
explanation  for  the  value  of  any  commodity,  be  it  repeated, 
is  found,  on  the  one  side,  in  the  demand  for  the  commodity, 
on  the  other,  in  the  fact  that  the  supply  of  productive 
means  is  limited,  whether  by  the  absolute  scarcity  of  these 
productive  facts,  or  by  a  scarcity  due  to  the  diverting 
influences  exerted  by  the  demand  for  other  commodities. 
And  the  actual  level  of  remuneration  is  everywhere  reached 
through  the  bidding  of  entrepreneurs  for  increased  pro- 
ductive intermediates  to  be  added  to  the  productive  effi- 
ciency already  in  hand;  and  the  actual  payment  is  thus 
commonly  in  some  rude  approximation  to  the  amount 
which  the  successful  bidder  is  able  to  pay  for  the  purpose 
of  enlarging  his  production  complex. 

With  goods  present  in  stocks  of  similar  items,  this 
approximation  is  theoretically  close  accordingly  as  entre- 
preneur competition  is  close.     Where  each  item  of  goods 

the  prostitute,  are,  in  the  economic  sense  of  the  term,  clearly  enough 
productive ;  on  the  other  hand,  the  three-card-monte  man,  the  shell- 
game  man,  and  the  gold-brick  man,  would  be,  at  least  by  the  naive 
intelligence,  ranked  as  agiencies  of  secondary  distribution,  under 
methods  more  or  less  ingenious  and  interesting.  Somewhere  near  the 
line  between  these  two  extremes  are  to  be  ranked  the  methods  most 
distinctly  characteristic  of  high  finance,  at  all  events,  most  notorious 
in  connection  with  it. 

The  promoter  or  underwriter  is  in  the  business  of  producing 
stocks  and  bonds  for  the  investment  and  the  speculative  markets ;  the 
products  are  commonly  of  considerably  greater  worth  than  those  of  the 
patent-medicine  vender,  and,  indeed,  are  often  of  the  very  highest 
title  to  market  recognition.  Relatively  small  stores  of  instrumental 
wealth,  much  good-will  or  franchise  or  monopoly,  more  of  pros- 
pectus and  gilded  promise  are,  under  the  guidance  of  high  ability  and 
ingenious  skill  of  organization,  combined  into  a  marketable  commodity 
most  profit-giving  to  the  producers,  commonly,  truly,  of  moderate 
advantage  to  the  purchasing  investors,  and  sorely  disastrous  to  the 
general  public.  All  this  is  hard  to  rule  out  of  the  category  of  market 
productivity  and  of  productive  distribution. 

The  later  processes  by  which  the  market  is  rigged  through  bear 
stories  and  through  artificially  low  dividends,  or  by  declaration  of 
unearned  or  bookkeeping  dividends,  may,  as  more  or  less  reputable 
predation,  be  safely  classed  as  entirely  within  the  field  of  secondary 
distribution.     (Cf.  Veblen,   Theory   of  Business  Enterprise,  passim.) 


568 


VALUE  AND  DISTRIBUTION 


is  sui  generis,  the  room  for  higgling  is  appreciably  more 
ample  and  the  point  of  price  adjustment  is  quite  possibly 
found  at  considerably  below  what  the  successful  bidder 
would,  if  necessary,  have  consented  to  pay. 

With  the  recognition  that  entrepreneurs  are  different 
must  come  the  abandonment  not  only  of  the  notion  that 
profits  can  arrive,  in  any  conceivable  state  of  equilibrium, 
at  equality,  but  also  of  the  notion  that,  at  no  matter  what 
point  of  development  in  technique,  there  can  ever  be  any 
one  best  formula  for  the  combining  of  the  various  differ- 
ent factors  or  classes  of  productive  agents.  There  is,  indeed, 
no  such  best  combination  for  any  one  entrepreneur,  except- 
ing upon  the  assumption  of  an  established  level  and  ratio  of 
prices  and  of  hires  upon  the  different  productive  agents ; 
with  each  change  in  these  relative  hires,  that  which  was 
best  becomes  not  best,  and  the  production  complex  under- 
goes a  reconstruction.  And  finally,  with  varying  financial 
resources,  the  best  combination  is  again  a  different  combina- 
tion. Most  men  are  compelled  to  adapt  their  productive 
combinations  to  the  conditions  set  by  their  capital  and  their 
credit;  what  additions  or  subtractions  of  different  factors 
are  expedient  depends  not  so  much  upon  what  would  be 
advantageous  if  the  entrepreneur  could  command  the  neces- 
sary resources,  as  upon  what  he  can  with  reasonable  caution 
attempt. 


CHAPTER  XXVII 

SUMMARY  OF  DOCTRINE 

In  the  interests  of  economy  of  space,  and  to  avoid  the 
further  detailed  repetition  of  what  has  already  been  suffi- 
ciently set  forth  in  earlier  pages,  the  following  propositions 
are  presented : 

Value  is  a  ratio  of  exchange  between  two  goods,  quanti- 
tatively specified.  The  concept  of  a  general  market  value 
depends  upon  the  assumption  of  an  established  medium  of 
exchange,  and  finds  its  only  expression  as  price. 

The  primary  fact  in  the  explanation  of  value  is  the 
existence  of  human  needs  and  desires.  Utility  as  expressed 
in  the  existence  of  goods  is  merely  the  relation  of  adapted- 
ness  of  the  thing  or  fact  to  the  human  need  or  desire. 
Limitation  upon  the  supply  of  goods  relatively  to  the  need 
gives  value.  Thus  value  in  producible  goods  is  ultimately 
explained  by  human  desires  over  against  a  limitation  of  sup- 
ply due  either  to  the  shortage  of  instrumental  goods  or  to 
the  irksomeness  of   efifort  or  to  both. 

With  great  esteem  for  good  singing  and  with  the  rarity  of  good 
singers,  the  high  gains  of  prima  donnas  find  sufficient  explanation. 

With  scarce  iron  mines  and  a  relatively  high  need  for  iron,  a 
high  value  upon  iron  is  readily  explicable. 

With  relatively  scant  equipment  of  land,  and  a  high  need  for 
wheat,  the  high  value  of  wheat  land  would  be  explained,  irre- 
spective of  the  fact  that  various  other  uses  for  land  further  greatly 
restrict  the  supply  of  wheat  land. 

Human  needs  and  their  relative  intensity  being  assumed, 
the  value-causal  sequence  runs  from  relative  scarcity  of 
agents  to  relative  scarcity  of  products ;  from  relative 
scarcity  of  products  to  high  exchange  power  of  products — 

569 


570  VALUE  AND  DISTRIBUTION 

high  vakie,  relatively  high  price ;  from  relatively  high  price 
of  products  to  relatively  high  remuneration  of  agents ; 
from  relatively  high  remuneration  of  agents  to  relatively 
high  present  worth  of  agents. 

Under  the  competitive  activity  of  various  and  differing 
entrepreneurs,  each  seeking  his  most  advantageous  line  of 
activity  in  view  of  his  particular  situation  in  point  of  capi- 
tal, credit,  ability,  and  preference,  market  supplies  of  prod- 
ucts are  worked  out  in  adjustment  with  the  price  demand; 
and  under  the  competitive  bidding  of  entrepreneurs  for 
productive  auxiliaries,  the  market  values  of  instruments 
and  agents  are  worked  out,  and  the  cost  situation  confront- 
ing each  individual  entrepreneur  determined. 

That  underlying  the  competitions  and  costs  of  entre- 
preneurs is  a  situation,  a  controlling  complex  of  funda- 
mental facts,  under  the  influence  and  direction  and  deter- 
mination of  which  the  details  of  market  production  and  of 
value  adjustment  take  place,  and  with  changes  in  which  most 
commonly  take  place  changes  in  the  resulting  market  adjust- 
ment, furnishes  us  with  the  principle  from  the  point  of 
view  of  which  must  be  examined  the  dynamics  of  value 
and  of  distribution,  a  group  of  problems  having  to  do  with 
the  manner  and  degree  of  change  in  market  adjustments 
attendant  upon  different  probable  or  possible  changes  in  the 
underlying   situation. 

Neither  in  utility  on  the  demand  side  nor  in  pain  cost 
on  the  supply  side  can  there  be  found  a  common  denomina- 
tor or  standard  or  determinant  of  market  value,  or  of  price 
as  its  money  expression.  The  only  common  denominator 
of  value  is  found  in  the  selection  of  a  conventional  stand- 
ard for  the  purpose,  a  price  commodity. 

Neither  in  terms  of  market-value  equivalence  nor 
in     terms     of     pain     or     cost,     but     only     in     terms     of 


SUMIMARY  OF  DOCTRINE  57 1 

utility  equivalence  is  to  be  sought  the  standard  of 
deferred  payments.  Equivalence  in  terms  of  unspecialized 
purchasing  power,  expressed  under  some  conventional  price 
standard,  is  the  only  resource  for  the  case. 

The  equation  of  demand  with  supply  is  an  explanation 
for  value  only  in  the  sense  that  the  entrepreneur-cost  situa- 
tion and  the  condition  of  price  demand  reflect  and  express 
the  effects  of  the  underlying  and  determining  situation. 
Therefore  both  demand  and  supply  themselves  require 
analysis  and  explanation. 

DEMAND 

Utility,  marginal  utility,  and  subjective  worth  are  pri- 
marily categories  leading  up  to  the  explanation  of  the 
demand  side  of  the  value  equation,  as  expressed  in  terms  of 
purchasing  power,  and  as  bearing  upon  the  price  adjust- 
ment of  any  particular  commodity. 

Marginal  utility — a  purely  individual  category  and  an 
absolute  magnitude — is  a  step  toward  explaining  subjective 
worth — a  purely  subjective  and  individual  fact  and  an  abso- 
lute feeling  magnitude,  the  cost  aspect  of  marginal  utility. 
Two  subjective  worths  in  comparison  explain  price  offer,  or 
refusal  price,  this  latter  being  merely  a  demand  fact  in 
another  aspect. 

To  different  men,  utilities,  marginal  utilities,  and  sub- 
jective worths  are,  as  such,  incapable  of  comparison ;  nor  is 
it  possible  to  give  to  utility,  marginal  utility,  or  subjective 
worth  expression  or  measurement  in  terms  of  money.  A 
maximum  demand  price  expresses  merely  the  equivalence, 
in  point  of  subjective  worth,  of  the  thing  bid  for  and  the 
thing  otherwise  to  be  obtained  through  the  purchasing 
power. 

COST 

The  emergence  of  value  is  not  dependent  upon  cost-of- 
production  influences  as  a  prerequisite,  but  only  upon  there 


572  VALUE  AND  DISTRIBUTION 

being  a  supply  limited  relatively  to  human  desires.  But  so 
far  as  the  cost-of-production  investigation  bears  to  explain 
the  relative  volumes  of  supply  of  different  commodities,  it 
bears  to  explain  the  values  of  these  commodities. 

For  competitive  purposes,  cost  of  production  is  purely 
a  computation  of  the  individual  entrepreneur ;  for  any  item 
or  quantum  of  product,  it  is  the  price  statement  of  the 
compensation  necessary  to  the  forthcoming  of  that  product. 

Outlay  costs  to  the  entrepreneur  are  distributive  shares 
to  the  recipients ;  the  distributive  share  of  the  entrepreneur 
also — his  profit — is  cost,  to  the  extent  that  it  is  necessary 
profit. 

But  the  distribution  that  takes  place  under  the  production 
process  and  as  part  and  parcel  of  it,  is  not  the  only  distributive 
process  in  society.  Such  incomes  as  are  received  otherwise  than  by 
title  of  separate  or  co-operative  productivity,  find  their  explanation 
in  those  other  social  facts  and  forces  which  distribute  purchasing 
power  in  society. 

All  productive-distributive  compensations  come  by  the 
same  and  equal  title  of  contribution  to  value  productivity; 
but  they  are  the  market  value  of  the  value  contribution 
rather  than  the  accurate  equivalent  of  the  value  productive- 
ness; this  last  varies  for  each  instrument  with  each  entre- 
preneur, and  is  nowhere  precisely  ascertainable  by  any. 

Only  relative  costs  of  production  have  to  do  with  the 
exchange  relations  of  goods. 

All  influences  making  to  increase  the  indemnity-price 
total  which  a  commodity  must  afford  to  its  producer  if  it  is 
to  be  produced,  rank,  under  the  price  denominator,  as 
costs ;  chief  amon^  these  influences  is  commonly  opportimity 
cost — demand  in  another  direction  functioning  as  resist- 
ance in  the  given  direction. 


SUMMARY  OF  DOCTRINE  573 

The  resistance  attractiveness  of  recreation  or  of  rest  may  also 
be  included  within  the  opportunity-cost  concept  if  interpreted 
broadly.  Instrument  and  agent  costs  are  often  accurately  to  be 
reckoned  as  costs  only  in  this  opportunity  aspect. 

As  a  cost  concept  capital  is  neither  technological  nor     i^- 
social  in  significance;  it  stands  for  the  total  invested  fund 
of   value,   inclusive   of   all   instrument   values,   and   of   all 
general  purchasing  power  devoted  to  the  gain-seeking  en- 
terprise; it  is  an  acquisitive  category. 

For  competitive  purposes,  the  capital  concept  should  be 
formulated  in  the  individual,  private,  and  competitive 
sense.  It  should  include  all  things,  facts,  or  rights  having 
value  so  that  to  them  abstinence — the  postponement  of  con- 
sumption— applies.  Capital  in  this  sense  is  a  private  fund 
of  wealth  expressed  under  the  price  denominator  and 
viewed  in  the  time  aspect.  The  market  value  of  any  basis 
of  income  is  the  present  worth  of  its  entire  series  of 
putative  incomes. 

Market  time — discount — interest  in  the  accurate  and  ulti- 
mate sense — is  the  premium,  expressed  as  a  rate  per  cent. 
per  unit  of  time,  which  any  fact,  as  present  purchasing 
power  expressed  in  terms  of  the  conventional  standard, 
commands  over  future  purchasing  power  likewise  expressed. 

The   surplus   in   any   instrument   hire   over   upkeep   or 
depreciation  is  a  market  time-discount  fact;  expressed  as  a      , 
ratio  between  the  value  of  the  instrument  and  the  hire,  it 
is  interest  in  the  accurate  sense. 

All  costs  are  merely  sacrifices  of  production  reduced  to 
terms  of  the  price  denominator.  Costs,  then,  include, 
among  other  items,  all  necessary  indemnities  for  capital 
outlays  in  production,  and  a  time-discount  charge  upon  the 
capital   fund  invested. 


574  VALUE  AND  DISTRIBUTION 

But  the  cost  to  the  individual  entrepreneur  is  not  a  funda- 
mental explanation  of  anything;  it  assumes  values  upon  instrumental 
facts  as  a  step  toward  value  explanation.  Nor  does  the  aggregate 
activity  of  entrepreneurs  explain  the  cost  conditions  facing  each, 
unless  and  until  the  great  underlying  facts  of  human  wants  and 
capacities,  and  of  instrumental  equipment  and  opportunity  are  in- 
cluded in  the  survey. 

Static-value  analysis  takes  as  definitive  and  ultimate  the  actually 
existing  total  situation,  inclusive  of  human  needs  and  productive 
powers,  and  with  all  the  existing  supplies  and  existing  limitations 
of  equipment  and  opportunity,  and  all  this  irrespective  of  how  far 
the  situation  is  due  to  an  original  bounty  or  to  an  original  inade- 
quacy, and  irrespective  of  whether  human  activity  has  in  the  past 
added  or  subtracted  relevant  elements,  aspects,  or  facts.  Not  the 
outlays  for  productive  facts,  or  these  same  outlays  regarded  as 
incomes,  but  the  scarcity  of  these  productive  facts  relatively  to  the 
human  need,  is  responsible  for  the  emergence  of  scarcity  of  prod- 
ucts anywhere  and  for  the  relative  scarcity  of  products  wliich  under- 
lies and  explains  exchange  relations. 

But  the  inadequacy  of  the  general  equipment  does  not  explain 
the  market  values  of  any  particular  line  of  products,  that  is  to  say, 
the  exchange  relations  beween  different  classes  of  goods.  Inside  the 
general  situation  of  inadequacy  of  productive  factors  must  be  worked 
out  the  relative  inadequacy  of  productive  equipments  for  the  various 
lines  of  commodities,  in  view  of  the  relative  strength  of  the  pur- 
chasing power  disposable  in  these  various  commodity  directions. 
Here  enter  the  influences  of  various  different  lines  of  production  to 
restrict  the  supplies  of  productive  factors  in  each  particular  line  of 
industry. 

All  rent  outlays,  whether  for  land  or  for  other  instru- 
mental goods,  and  all  wage  outlays  and  all  discount  charges 
upon  the  capital  fund  employed  in  production  are  equally  to 
be  included  within  costs  of  production  as  an  intermediate 
explanation  of  the  supply  side  of  the  value  equation. 

Nowhere  is  the  distinction  between  price-determining  and  price- 
determined  costs  valid.  In  the  main,  the  value  of  each  productive 
fact  is  value-determined;  but  as  part  of  the  supply  of  productive 
facts,  each  is,  through  its  products,  in  its  small  measure,  a  value- 
affecting  influence.  So  also  each  individual  activity  bearing  upon 
price  or  related  to  price,  whether,  on  the  one  hand,  of  production  or 
of  sale  offer,  or,  on  the  other  hand,  of  price  offer  or  of  price 
refusal,  is,  in  the  main,  price-determined,  because  chosen  in   view 


SUMMARY  OF  DOCTRINE  575 

of  the  actual  price  situation  and  in  adaptation  to  this  situation;  but 
each  such  activity,  as  affecting  in  its  own  small  measure  the  aggre- 
giite  of  supply  or  of  demand,  must  thereby  and  pro  tanto  act  as  a 
price-determining  influence. 

The  only  one  of  the  several  rent  concepts  important  to 
'le  cost  analysis  is  that  of  the  actual  hire;  but  as  oppor- 
t  mity  cost,  the  land  or  any  other  productive  fact  may 
'  g-ure  as  cost  at  something  vaguely  more  than  the  actual 
J  ire  paid. 

Costs  to  the  entrepreneur  are  mostly  but  not  entirely 

traceable    (i)    to  value   serviceability  to  entrepreneurs   in 

other  lines  of  production,  or  (2)  to  value  serviceability  to 

ntrepreneurs  in  the  same  line  of  production,  or   (3)    to 

Iternative    value    possibilities    of    the    productive    facts, 

iclusive  of  the  entrepreneur's  own  productive  power,  when 

under  his  own  employment.     But  pain  and  weariness  and 

displaced  recreation  have  also  their  place  in  fixing  the  total 

remuneration  necessary  to  the  forthcoming  of  product. 

All  margins  are  ultimately  personal  and  not  instru-  ^ 
ment  margins.  Instruments  are  marginal  only  with  refer- 
ence to  the  entrepreneur  and  relatively  to  him  and  to  his 
situation;  marginality  is  a  psychological  attitude  with 
reference  to  productive  activity  or  to  the  productive  employ- 
ment of  instruments. 

Marginal  instruments  are  variously  understood  to  indicate  (i) 
valueless  instruments,  a  market-value  standing,  not  inconsistent  with 
the  rendering  of  services  for  which  the  user  would,  if  necessary, 
pay  an  appreciable  hire;  (2)  instruments  having  neither  market- 
value  nor  personal-value  significance;  (3)  instruments  which  at  the 
actual  market  charge  are  just  barely  worth  employing  by  the  actual 
employer. 

Number  one  is  a  concept  derivative  from  the  relationships  of 
instrumental  goods  to  entrepreneur  activity,  but  not  necessarily  giv- 
ing a  precise  expression  to  any  one  of  these  relationships.  Numbers 
two  and  three  are  meaningless  excepting  in  terms  of  relativity  to 
entrepreneur  activity.  Marginality  is,  in  last  analysis,  an  entre- 
preneur attitude  with  relation  to  one's  own  productive  activity  or  to 
the  productive  efficiency  of  agents  and  instruments. 


INDEX 


Abstinence:  Carver  on,  225,  n.  See 
Cost  of  Production;  Interest;  Cap- 
ital. 

Abstract  Capital,  170-74.  See 
Capital. 

Austrian  School:  terminology 
criticized,  308-11.  See  Boehm- 
Bawerk;  Wieser;  Utility,  Cost  and 
Utility,  Subjective  Value. 

Average  Man,  446,  n. 

B 

Bagehot,  Walter:     cited,  166,  n. 

Banking:  Essential  nature  of,  231, 
n.,  255,  n. 

Boehm-Bawerk,  Eugen  v.:  chaps, 
xvii,  xviii,  xix;  explanation  of  in- 
terest, chap,  xiv;  controversy  with 
Clark,  201-12;  controversy  with 
Dietzel,  339-51;  on  capital,  155, 
n.,  211,  215,  n.;  on  price  adjust- 
ment, 543-48.     See  Interest. 

Bullock,  C.  J.:  on  laws  of  return, 
493- 

BoNAR,  J.:   on  Hedonism,  307,  n. 

C 

Caird,  Edward:  on  Hedonism,  213, 
n. 

Cannan,  Edwin:  savings  vs.  in- 
come, 554;   on  income,  559,  n. 

Cairnes,  J.  E.:  chap,  vi;  cost  as 
life-draft,  382,  n.;  loan-fund  capi- 
tal, 165. 

Cantillon,  R.:   laws  of  return,  492. 

Capital:    chaps,  x,  xi,  xii. 

— Is  land  capital?  chaps,  x,  xi;  50; 
socially  viewed,  chap,  xi;  competi- 
tively viewed,  chap,  xi;  fixed  and 
circulating,  170,  n.;  Ricardo's, 
Smith's,  Senior's,  James  Mill's, 
J.  S.  Mill's,  views  on,  170,  n.; 
productivity  of,  and  interest, 
chaps,  xiv,  xv.  See  Factors  of 
Production;  Loan  Fund. 


— As  loan  fund:  chap,  xii;  Cairnes's 
view,  165;  Ricardo's  confusion, 
42;  related  to  banking,  165-69. 
Are  men  capital?  154,  n. 

— Various  concepts:  Boehm-Ba- 
werk, 155,  n.;  Fetter,  147,  n., 
154,  n.;  Fisher,  147,  n.,  157,  n.; 
Smith,  149;  Ricardo,  151;  J.  S. 
Mill,  151,  n.;  Tuttle,  154,  n.; 
Veblen,  153;   Clark,  170-74. 

— Wage-fund  capital,  148. 

— Abstract  capital,  170-74. 

— Competitive  capital,  chap.  xi. 

Carver,  T.  N.  :  on  abstract  capital, 
172,  n.,  173,  n.;  abstinence  and 
interest,  225;  factors  of  produc- 
tion distinguished,  131,  n.;  on  op- 
portunity cost,  383,  n.;  profits  re- 
lated to  cost,  100,  n.,  106,  n.;  wage 
determination,  518;  measure  of 
value,  181,  n.;  laws  of  return,  489, 
493,  n.;  criticism  of  Clark,  440,  n.; 
controversy  with  Hobson,  476,  n. 

Charity:    expenditure  for,  529,  n. 

Clare,  J.  B.:  chap,  xxii;  abstract 
capital,  170-74;  entrepreneur  cap- 
ital, 479,  n.;  on  interest — contro- 
versy with  Boehm-Bawerk,  201-12; 
on  roundaboutness,  208,  n.;  doses 
of  outlay,  432,  434;  labor  as  fund, 
263;  nature  of  rent,  397,  n.;  dy- 
namic forces,  480,  514. 

Commons,  J.  R.:  laws  of  return, 
499.  n- 

Competitive  Capital.    .See  Capital. 

Consumption:  productive  and  un- 
productive.    See  Productivity. 

Cost  of  Production:  various  cost 
concepts,  chap,  i;  Adam  Smith's 
doctrine,  chap,  ii;  Ricardo's  doc- 
trine, chap,  iii;  labor-purchase 
cost,  I,  8;  labor-time  cost,  3;  labor- 
value  cost,  4;  labor-pain  cost,  3, 
62-83;  non-competitive  groups, 
71-80;  labor  not  always  painful, 
48,  82;  abstinence  as  pain  cost — 
Senior,  45;   skill  and  cost,  75;  real 


577 


578 


VALUE  AND  DISTRIBUTION 


costs — Marshall,  373;  cost  in 
Crusoe  economy,  84. 

-Opportunity  cost,  5,  6;  Adam 
Smith's  doctrine,  10-12;  Ricardo's 
doctrine,  31;  Senior's  doctrine, 
48,  49;  Austrian  doctrine,  356; 
displaced  utility  as,  85,  347,  366; 
any  displacement  as,  87;  alterna- 
tive use  as  rent,  290-5;  as  related 
to  profit,  89-92;  various  views  as 
to  profit  opportunity — Fetter  98, 
n. — Seagcr,  99,  n. — Flux,  99,  n. — 
Carver,  100,  n. — Seligman,  100,  n. 

-Collectivist  cost,  291,  356. 

-Abstinence  as  cost:  as  to  land — 
Senior,  50;    capital-use  cost,  5. 

-Interest  as  cost:  J.  S.  Mill's  ex- 
planation, 58,  59. 

-Wage-subsistence  cost,  24. 

-Profit  as  cost,  56;  only  part  is,  65; 
relation  of  profit  to  cost,  88;  Had- 
ley's  doctrine,  89;  Mill's,  90; 
Walker's,  91;  Fetter's,  104;  Sea- 
ger's,  104;  Carver's,  106;  Flux's, 
106;    Seligman's,   100. 

-Cost  merely  relative,  85,  262;  com- 
parative cost — Cairnes,  64;  J.  S. 
Mill,  60;    is  opportunity  cost,  60. 

-Entrepreneur  cost,  10;  adopted 
by  J.  S.  Mill,  52,  56. 

-Rent  and  cost,  chap,  xvi;  J.  S. 
Mill's  doctrine,  60;  Say's  116-18; 
Ricardo's  controversy  with  Say, 
109-13;  Mallhus'  doctrine,  283; 
Senior's,  50,  283;  Adam  Smith's, 
24,  27;  Ricardo's,  36,  38;  Hob- 
son's,  414-35;   Wieser's,  371. 

-Marginal  cost,  chap,  xvi,  262;  in- 
cludes various  influences,  87,  n.; 
extensive  and  intensive  margins, 
426;  price-determining  vs.  price- 
determined,  401,  n.,  425;  margin- 
determining  vs.  margin-deter- 
mined, chap,  xvi,  273. 

-Land  as  opportunity  cost — J.  S. 
Mill,  59,  61;  views  of  Patten, 
Jevons,  A.  S.  Johnson,  Macfar- 
lane.  Fetter,  Hobson,  Hyde,  290- 
95;  Marshall,  385-98. 

-Relation  of  different  factors  to  cost, 

135-37- 
-Risk  cost,  98. 
-Utility  vs.  cost,  339-52. 
-Ultimate   determinants — situation 

cost,  282,  283,  285,  294. 
-Skill  and  cost,  75. 


D 

Davenport,  H.  J. ;  Outlines  of  Eco- 
nomic Theory,  cited,  186,  n.,  187 
n.;  depressions,  228,  n.;  normal 
price,  279  n.;  normal  value,  481 
n.;   rent,  523,  n. 

Deferred  Payments.  See  Standarc 
of  Deferred  Payments. 

Dem.\nd:  curves,  chap,  xxv.;  de- 
fined, 532,  n. 

DiETZEL,  Heinrich:  criticized  bj 
Hobson,  409;  controversy  witl 
Boehm-Bawerk,  339-51- 

Diminishing  Return.    See  Return 

Distribution:  chap,  xxvi;  b} 
value  productiNity,  chap,  xxii,  360 
364- 

Doses:  of  outlay,  427;  size  of 
478,  n.;  views  of  Hobson  and  Car 
ver,   476,   n.     See  Rent. 

Dynamics:  of  value  and  distribu- 
tion, chap.  xxiv. 

E 

Effective  Utility.  See  Marginal 
UtiUty. 

Entrepreneur  Capital.  See  Capi- 
tal. 

Expenses  of  Production:  ex- 
penses vs.  costs,  273,  383,  n.  See 
Cost  of  Production. 


Factors  of  Production:  a  techno- 
logical classification,  126-35,  128, 
n.;  Carver's  view,  131,  n.;  Sen- 
ior's view,  137,  n.  -See  Land; 
Labor;  Capital;  Cost  of  Produc- 
tion. 

Fetter,  F.  A.:  definition  of  de- 
mand, 532,  n.;  interest  theory, 
208,  n.,  212;  roundaboutness, 
207;  income,  559,  n.;  profits  re- 
lated to  cost,  98,  n.,  104,  n.;  ex- 
pense cost  and  opportunity  cost, 
383,  n.;  utility  and  marginal  util- 
ity, 315,  n.;  laws  of  return,  497,  n; 
5ee  Capital,      ''i^y  .^^  i^.'/i- 

FiSHER,  Irving:  on  income,  559,  n.; 
savings  vs.  income,  554;  interest 
theory,  242,  n.     See  Capital. 

FiTE,  Warner:  on  Hedonism, 
308,  n. 


INDEX 


579 


Flux,  A.  W. :  definition  of  demand, 
532,  n.;  profits  related  to  cost,  99, 
n.;  106,  n. ;  expense  cost  and 
opportunity  cost,  383,  n.;  laws  of 
return,  496,  n. 

Funding  of  productive  factors,  263. 

Forced  Gains,  422,  426;  Hobson 
on,  405,  n. 

G 
Galiani,  F.,  107,  231,  n.,  233. 
GiDE,  Charles:    on  laws  of  return, 

496,  n. 
GiFFEN,  Robert:   determination  of 

value,  548,  n. 
GONNER,  E.  C.  K.,  30. 
Green,  D.  I.,  93. 

H 

Hadley,  a.  T.:  definition  of  de- 
mand, 532,  n.;  profits  related  to 
cost,  89. 

Hedonism,  48,  n.,  303-10. 

Hobson,  J.  A.:  chap,  xxi;  forced 
gains,  405,  n.;  rent  and  cost,  414- 
35;  displaced  rent  and  cost,  290; 
controversy  with  Carver,  476,  n.; 
savings,  529,  n.;  utility  and  value, 
325,  n- 

Hollander,  J.:  rent  and  cost,  290; 
intensive  margin,  266. 

Hyde,  A.  M. :  rent  and  cost,  290. 

Hyndman,  H.  M.  :  labor  measure  of 
value,  177,  n. 

I 

Increasing  Return.    See  Returns. 

Income:   vs.  capital,  554. 

Interest:  chaps,  xiv,  xv;  defined, 
188;  problem  stated,  190-93;  pro- 
ductivity theory,  chap,  xiv;  as 
cost;  see  cost  of  production;  risk, 
95;  roundaboutness,  207;  Boehm- 
Bawerk  on,  194;  Fisher,  242,  n.; 
Ricardo's  difficulty,  36-41;  Veb- 
len  as  to  relation  to  credit,  255,  n. 


Jevons,  W.  S.:  relation  to  eco- 
nomic doctrine,  334,  n.;  on  utility, 
316,  n.;  definition  of  wealth,  314, 
n.;  displaced  rent  and  cost,  290; 
subsistence  goods  as  capital,  209. 


Johnson,  A.  S.:    displaced  rent  as 

cost,  290. 
T£^***S0N,  J.    F. :    on   loan   capital, 


Labor  :  as  cost :  see  Cost  of  Produc- 
tion; as  fund,  263,  459;  produc- 
tive and  unproductive:  see  Pro- 
ductivity; as  cost  denominator,  15, 
25,  1x8;  as  cost  determinant,  15; 
as  standard  of  deferred  payments, 
1 5 ;  real  value  of,  11;  as  real  price, 
8,  11;  value  proportioned  to — 
Ricardo,  chap,  iii,  Cairnes,  chap, 
vi.     See  Factors  of  Production. 

Lamarck,  J.  B.  P.  A.,  308,  n. 

Land:  as  capital:  see  Capital;  as 
funded,  263,  414,  419,  422;  up- 
keep, 435;  incidence  of  tax  on, 
248,  n.  See  Factors  of  Produc- 
tion;  Rent. 

Laughlin,  J.  L.  :  measurement  of 
value,  181,  n. 

Laws    of    Return.     See   Returns. 

Loan  Fund:  Ricardo  on,  160.  See 
Capital. 

Luxury,  529,  n. 

M 

Macfarlane,  C.  W.  :  utility  and  de- 
mand curves,  536,  n.;  forced  gains 
405,  n.;  Walker's  definition  of 
profit,  400;  rent  of  labor,  400,  n.; 
labor  as  fund,  263,  n.;  interest, 
206,  n. 

Mackenzie,  J. :  on  Hedonism,  307,  n. 

McCulloch,  J.  R.:  interest  as  cost, 
37>  40- 

Malthus,  T.  R.:  laws  of  return, 
chap,  xxiii;  doctrine  of  cost,  283; 
on  general  glut,  218,  n.,  231,  n.; 
labor  as  cost  measure  and  deter- 
minant, 118,  n.;  rent  and  cost,  55, 
n.,  56,  n.;  cost  doctrine  criticized 
by  Senior,  48,  n. 

Margins:  extensive  and  intensive: 
see  Cost  of  Production;  personal 
or  instrumental,  424,  chap,  xvi; 
"  in  price  fixation,  405;  nature  of 
land  margin,  286;  cause  or  result, 
275;  various  kinds,  87,  n.,   278,  n. 


58o 


VALUE  AND  DISTRIBUTION 


Marginal  Utility:  chap.  x\1i;  as 
value  determinant,  chap.  xxii. 

Marshall,  Alfred:  chap,  xx; 
measurement  of  utility  by  price, 
372;  on  Jevons,  337,  n.;  displaced 
rent  as  cost,  290;  margins  and 
cost,  273;  long-time  reckoning, 
480;    criticized   by  Hobson,  409. 

Marx,  Karl:  on  money,  238;  labor 
measureof  value,  177,  n.;  labor  as 
fund,  263. 

Menger,  Anton:  relation  to  eco- 
nomic doctrine,  334;  definition  of 
subjective  value,  327;  principle  of 
imputation,  360;  capitalization, 
208,  n. 

Mercantilists:  value  doctrine,  107; 
notion  of  productivity;  see  Pro- 
ductivity. 

Mill,  James:  interest  as  cost,  37, 
39-41;  general  glut — controversy, 
with  Malthus,  118,  n.,  231,  n. 
See  Capital,  fixed  and  circulating. 

Mill,  John  Stuart:  chap,  v; 
cost,  chap,  xvi;  marginal  cost  and 
relative  cost,  262;  profit  related  to 
cost,  90;  displaced  rent  as  cost, 
290.     See  Capital;    Productivity. 

Money:  its  place  in  value  theory, 
217-20;  function  in  deferred  pay- 
ments, 217-20.     See  Price. 

Monopoly:  cost  in,  565,  n. 
N 

Non-competitive  Groups,  71-80. 
O 

Opportunity  Cost.  See  Cost  of 
Production. 

Ostentation:  in  industrial  depres- 
sions, 529,  n.     See  Luxury. 

Outlay  Cost.  See  Cost  of  Produc- 
tion;   Entrepreneur  Cost. 

Overproduction,  227,  n.;  possi- 
bility of,  231,  n.;  in  industrial  de- 
pressions, 231,  n. 

P 

Pain  Cost.     See  Cost  of  Production. 

Panics:  depression  following,  231,  n. 

Pantaleoni,  Maffeo:  relation  to 
economic  doctrine,  338,  n.;  defini- 
tion of  demand,  532,  n.;    Hedon- 


ism, 310,  n.,  311  n.,  on  Galiani, 
233.  n. 

Patten,  Simon:  recreation  cost,  48, 
n.;    displaced  rent  and  cost,  290. 

Physiocrats:  cost  theory,  107.  See 
Productivity. 

PiERSON,  N.  G.:  on  cost,  268,  n. 

Pleasure.     See  Utility. 

Population:  redistribution  of,  486; 
and  wages,  519.     See  Subsistence. 

Price:  defined,  218;  adjustment  of,      ^ 
chap,  xxv;    peculiarities  in  theory      /\ 
of,  238,  n.;    normal,  279,  n.;    rent 
and  price.   See  Rent. 

Production:  what  is,  555.  See 
Factors  of  Production. 

Productivity:  defined,  121-24; 
productive  labor,  122,  n.;  produc- 
tive consumption,  122,  n.;  Mer- 
cantilist notion,  122,  n.;  Physio- 
cratic  notion,  122,  n.;  funded,  460; 
distribution  by,  285;  interest  ac- 
cording to,  chap.  xiv.  See  Fac- 
tors of  Production. 

Profits:  as  cost;  only  part  are  cost, 
65;  necessary  or  minimum,  90; 
net  or  competitive,  102,  n.;  rela- 
tion to  cost,  89-91;  Hadley's  view, 
89;  J.  S.  Mill's,  58,  90;  Walker's, 
91;  risk  profit,  96-98.  See  Cost 
of  Production. 

Promotion:  profits  of,  557,  n. 

Q 

Quantity  Theory,  241,  n. 

Quasi-Rents:  and  costs,  395-98, 
401,  n. 

QUESNAY,  Franjois:  laws  of  re- 
turn, 492. 

R 

Rent:  various  concepts,  370,  419, 
n.;  causes  of — Malthus,  Ricardo, 
Senior,  283,  284;  on  labor,  399; 
affected  by  improved  technique, 
523,  n.;  incidence  of  tax  on,  248, 
n.;  as  cost:  see  Cost  of  Produc- 
tion. 

Representative  Firm,  374,  n. 

Return,  Laws  of,  chap,  xxiii. 

Ricardo,  David:  chap,  iii;  pain 
cost,  3;  controversy  with  Say  on 
cost,  109-13;    riches  vs.  value,  3; 


INDEX 


581 


cause   of   rent,    283.     See   Rent; 

Cost  of  Production;  Capital,  fixed, 

circulating,  and  Loan  Fund. 
Robertson,  J .  M.  :  on  saving,  5  29,  n . 
ROUNDABOUTNESS.     See  Interest. 
RUSKIN,  John:   on  saving,  529,  n.; 

definition  of  demand,  532,  n. 


Savings:  as  loan  fund,  chap,  xiii; 
"fallacy  of,"  529,  n.;  market  for, 
in  prosperity  and  in  depression, 
231,  n.;  how  far  desirable,  221-25; 
upkeep,  435,  n.  See  Capital;  In- 
terest;  Abstinence. 

Say,  J.  B.:  chap,  ix;  on  capitaliza- 
tion, 208,  n.;  controversy  vi^ith 
Ricardo  on  cost,  109-13;  loi  de 
debouchees,  238,  n. 

Seager,  H.  R.  :  expenses  and  oppor- 
tunity cost,  383,  n.;  profit  related 
to  cost,  99,  n.,  104,  n.;  on  Hedon- 
ism, 309,  n.;  definition  of  demand, 
532,  n.;   laws  of  return,  495,  n. 

Seligman,  E.  R.  a.:  social-organ- 
ism doctrine,  443,  n.;  expenses 
and  opportunity  cost,  383,  n.;  profit 
related  to  cost,  100,  n.,  103,  n.; 
displaced  rent  and  cost,  292,  n.; 
on  Hedonism,  309,  n.;  utility  and 
marginal  utility  confused,  315,  n.; 
laws  of  return,  496,  n. 

Senior,  W.  N. :  chap,  iv;  definition 
of  wealth,  314,  n.;  abstinence  as 
pain  cost,  45;  opportunity  cost, 
48;  causes  of  rent,  284,  n.;  utility, 
317,  n.  See  Capital;  Factors  of 
Production. 

Sewall,  H.  R.,  107. 

Sedgwick,  H.,  225,  n. 

Single  Tax,  248,  n. 

Skill:   related  to  cost,  75. 

Smith,  Adam:  chap,  ii;  various  cost 
doctrines,  2;  capital  concept,  148; 
rent  and  cost,  27.     See  Capital. 

Social  Dividend:  defined,  121, 
chap.  xxvi. 

Social  Organism:  chap,  xxii,  441, 
n.,  458. 

Standard  of  Deferred  Payments  : 
chap,  xiii;  labor,  utility,  or  value, 
15-18,  chap.  xiii. 


Standard  of  Living,  518,  529,  n. 
Subjective  Exchange  Value,  330. 
Subjective  Value:  chap.  xvii. 
Subjective  Worth,    347;     a  cost 

concept,  354.  ^ee  Subjective  Value. 
Subsistence:     relation    to    wages, 

435,  n.;   goods  as  capital,  208-10. 
Supply:  defined,  532,  n.;  curves  of , 

chap.  XXV. 


Taxation:  incidence  of,  on  land 
and  rent,  248,  n. 

Thackeray,  W.  M.,  300,  n. 

Transferability,  314,  n. 

Transportation:  an  agricultural 
process,  486;  effect  of  improve- 
ments on  rent,  523,  n.;  chap.  xxiv. 

Turcot,  A.  R.  J.,  107. 

TUTTLE,  C.  A.:  capital  concept, 
154.  n. 

U 

Underconsumption.  See  Overpro- 
duction. 

Upkeep:  of  land  and  of  labor,  435. 
See  Interest. 

Utility:  displaced  as  cost;  ^ee  Cost 
of  Production,  Opportunity  Cost; 
curves  of,  chap,  xxv;  intrinsic  or 
extrinsic,  317,  n.;  absolute  and 
relative,  3 1 7,  n. ;  relative  marginal, 
299;  comparability,  300,  302-14; 
vs.  cost,  339-51.  See  Marginal 
UtiHty;  Subjective  Value;  Cost 
of  Production. 

V 

Value:  real  and  exchange,  31,  34;  )( 
vs.  riches,  33;  can  it  be  measured  ?  ^ 
177,  178,  181,  n.;  views  of  social- 
ists, 177,  n.;  Marx's,  177,  n.,  181, 
n.;  Laughhn's,  181,  n.;  Carver's, 
181,  n.;  Walsh's,  188,  n.;  natural 
value,  358.  See  Subjective  Value; 
Price.^ 

Veblen,  T.  B.:  profits  and  time,  97, 
n.;  credit  related  to  price,  interest, 
and  profit,  255,  n.;  profits  of  pro- 
motion, 567,  n.;   saving,  529,  n. 


S82  VALUE  AND  DISTRIBUTION 

W  Whittaker,  a.  C.  :  on  Adam  Smitl 

Wages:    subsistence  minimum,  435,  23,  25,  n.;    Malthus,  56,  n.;    R 

n.     See  Labor;    Cost  of  Produc-  cardo,  34,  n.;   Mill,  59,  n.;  Semo 

tion;   Subsistence.  5  2,  n. 

Walker,  Francis:  profit  related  to  Wieser,    Friedrich,    v.:     chap 

cost,  01;   marginal  cost,  265;   rent  xvn,  xix;   mterest,  199,  200;  cap 

of  labor,  400.  talization,    208,    n.;     prmciple   ( 

T                 1  .•         X  imputation,  ^60-62;    demand  fc 

W.ALRAS,   Leon:    relation    to    eco-  prc^ductive  goods,  512. 

nomic  doctrine,  334,  n.  ,^  '          ,  ,-      , 

TIT           r-  TVT      \     A    A    zA(        1  Work:  defined,  556. 

Walsh,  C.  M.  :  standard  of  deferred  -^-^ 

payments,  188,  n.  Z 

Wealth:  defined,  314,  n.  Zones  of  Indifference,  472. 

Weissmann,  a.,  308,  n.  Zuckerkandl,  R.,  339,  341- 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 
THE  UNIVERSITY  LIBRARY 

This  book  is  DUE  on  the  last  date  stamped  below 


FEB  5 


ly^fc 


VEB 


^4\9W 


t£c  2 1  mi 


\ 


!  JUL  2  3  1937 


•^fiV  ^ 


'^ 


my  2  8W6 


JJIN  30  1947. 
MAY  2  51950. 

APR?    rttCD^ 


^W£ 


MARe 


FEB     2  193l/^ 


JAN 


<? 


Form  L-9-15m-3,'34 


Jmg3  im 


1359/XX 


•otiNi^" 


'y}: 


3  1158  01213  2204 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    001  168  482    6 


